Cash Flow Pitfalls for Canadian Entrepreneurs

Every business owner has heard the saying that, “cash is king”. However, too often, businesses find themselves short on liquidity at the times they need it most. Monitoring and understanding an enterprises’ cashflow provides cushion in times of hardship and ensures that your employees are paid the right amount on time.

Read on to learn a few do’s and do not’s that will help you retain a healthy cash reserve and protect your business from severe financial and even legal censure.

What to ask yourself when analyzing your company’s cash flow:

• How much is available?
• When will your liquidity dissipate?
• Do you have enough liquidity to pay your employees?

Cash Flow Pitfalls that endanger enterprises:

• Failing to get comprehensive input on how to manage cash
  • When deciding where, when and how much of your enterprise’s cash-flow to spend, you need to ensure you understand how every piece of the corporate puzzle will affect projected liquidity
  • If you leave out the team members who have the best understanding regarding production, overhead and operational costs, then you are really just guessing at how much cash-flow you have to work with
• Failing to perpetuate awareness regarding cash-flow
  • Everyone makes mistakes and that is especially true when it comes to financial forecasting
  • By creating weekly variance reports, you help your team members improve their estimates of liquidity
  • Over time, your team will improve at understanding exactly how much cash their department uses and the variances will draw closer to zero
• Distancing yourself from the management of cash
  • Entrepreneurs are passionate and they are busy, which means that administrative and accounting work can fall to the wayside
  • If you do not keep a close eye on the cost of operations, you may get an unpleasant surprise when you realize that emergencies and redundant expenditures have left you without liquidity
  • Monitor, handle and distribute cash to stay on top of where it is going and at what rate
• Counting on liquidity that is not actually available
  • When looking at cash, you need to ensure that your projections actually line up with the reality of day-to-day operations
  • When creating a cash-flow forecast, you need to accurately account for movements of capital
  • Generalized assumptions will render your cash-flow projection inaccurate as it is not necessarily true that a $500 transaction will result in exactly a $500 gain or loss of cash
  • By wrongly assuming how much cash is available, leadership may purchase inventory that they cannot pay for leading to disruptions in vendor relations and production
• Not being realistic about cash-flow
  • When your cash begins to dry up, you still need to generate accurate reports that tell this story
    • If you attempt to skew your loss of liquidity, you hinder your team members’ ability to work together to control expenditures
  • Don’t disguise your financial situation when speaking with stakeholders
    • The truth will come out and their trust will be compromised, hurting your chances for future support
  • If you are in cash-flow trouble, do not write cheques that you know will bounce
    • This practice comes with financial and legal consequences, and it hurts your brand
  • If liquidity dries up, business may shut down
    • If you don’t have any cash, you can’t pay your employees and, that means, you can’t expect them to work
    • Payroll has an immense impact on the amount of cash a business is able to leverage
    • As a business owner, you need to know how much of your cash goes into payroll, when this happens, and how it is handled
      • If your company’s liquidity becomes distressed, you will need to understand these factors to be able to strategically manage your cash outflow to keep your employees working
      • If your payroll is self-funded, in times of financial crisis you need to instigate withholding procedures immediately

    Don’t let cash-flow pitfalls be the downfall of your entrepreneurial enterprise. Learn accounting best practices from a team of accountants who have been serving Canadian entrepreneurs for several decades. Contact Hogg, Shain & Scheck to avoid and conquer cash-flow pitfalls.