2020-03-12 09:44:53 Cash Flow English Positive cash flow is critical to the success of any small business. Learn how to fill cash flow gaps with 2019 now over, and forecast for... https://quickbooks.intuit.com/ca/resources/ca_qrc/uploads/2020/03/cash-flow-feature-canada.jpg https://quickbooks.intuit.com/ca/resources/cash-flow/cash-flow-gaps-2020/ How to fill your end-of-year cash flow gaps and get positive in 2020

How to fill your end-of-year cash flow gaps and get ‘positive’ in 2020

18 min read

Positive cash flow is often the definition of success for small business. More money coming in than going out, determines whether or not you can pay vendors and leases, apply for loans, and ultimately take home a profit.

Unfortunately, adding seasonal staff, paying your employees an end-of-year bonus, increased advertising spend, and ordering extra inventory over the holidays can eat into your small business Q4 profits. That’s why you need to properly forecast and plan for unexpected cash flow issues.

According to a recent WePay survey, “70% of entrepreneurs reported that they experienced at least one critical cash flow issue between Thanksgiving and Boxing Day.”

If you’re experiencing cash flow gaps and are worried about how you’ll make it into the New Year and beyond, this post is for you.

Let’s examine how cash flow impacts small businesses, solutions to incorporate right now, and how to prepare a year-end as well as 2020 forecast.

How cash flow impacts small businesses

Intuit recently completed a global survey, called “The State of Small Business Cash Flow” Report. It unpacks the state of small business cash flow in Canada, and the results are surprising.

We found that nearly two in three (64%) Canadian small businesses have experienced cash flow issues at some point, and almost one-third (29%) have not been able to pay their employees.

Likewise, Canadian small business owners lose an average of $28,885 by foregoing a project or sales specifically due to issues created by insufficient cash flow. That could mean the difference in hiring a part-time employee or paying a lease to turn an e-commerce enterprise into a brick-and-mortar store.

It’s important to note that even though companies often have money on the way, they’re still forced to say no to opportunities if they don’t have cash flow available at the time of the ask.

So when consumer demand is at its highest around the holidays, you need solutions to maximize your year-end revenue potential.

Potential reputational damage

Small businesses thrive on building positive relationships, whether they be between customers, employees or vendors. It’s vital for building-long term success. However, not having access to enough cash flow can result in small businesses missing payments, or not have the money to pay people at all.

Among small business owners who have had cash flow issues, nearly a third (33%) have been unable to either pay vendors, pay loans, or pay themselves or employees (29 per cent) at one point in time.

When payments get unpredictable, it’s a safe bet that employee loyalty will be strained, as well. Because your employees can often be in a customer-facing position, it’s important that they’re committed to your business’s success.

Halted investments

Although your small business may have money on the way, not having access to cash flow can deny opportunities for you to invest in the long-term growth of your business.

In fact, more than three in five (62%) Canadian small business owners report that the time it takes the money to process after receiving a payment has the largest impact on their company’s cash flow.

Slow payment collection

Retailers who sell products to consumers get paid upfront. Still, it’s common to have longer payment terms when your clients are other businesses.

Unfortunately, not all clients pay on time, and the wait is even longer if the funds have to clear with a bank. In our survey, 37% of respondents said they typically wait more than 30 days for payment.

Remember: cash is king. You might look at your invoice numbers and feel safe because you have plenty of receivable payments due in a few weeks. However, sending invoices to your clients isn’t the same as getting paid.

Try to prevent payment delays by changing how your cash pipeline is structured:

  • Adjust your payment terms: Are you currently using a 30, 45, or 60-day payment cycle? Give buyers a shorter payment window to keep cash flowing into your business more often.
  • Accept multiple forms of payment: The more options you provide to clients, the easier it is to get paid quickly. While it’s satisfying to get a cheque in the mail, bank transfers and credit card payments are much faster.
  • Charge late fees: Does the fear of losing customers stop you from charging fees? Fees give your clients an incentive to comply with payment terms, and the added funds help to beef up your cash reserves.
  • Offer early-payment incentives: Chances are, you have some clients who love to save money. Give them extra motivation to pay early by offering a small discount. You can also roll out a slight price increase over time to keep your earnings the same while improving cash flow.

Delays in small business payroll

Coming up short on payday is one of the biggest threats to business success. Employees rely on predictable cash flow just as much as you do. Late paychecks undermine trust, cause personal hardship for employees, and drive your workforce to look for jobs elsewhere.

The Intuit study found that about 29% of Canadian business owners who have had cash flow issues were unable to pay themselves or their employees at some point. If you can’t compensate employees promptly, you could even face a lawsuit for back pay.

You might also have to cut back on the volume of customers you serve or cancel jobs on short notice. You might try to outsource essential services to subcontractors. But either way, you risk losing income while you scramble to get business operations back on track.

Use a business online payroll platform to stay on top of wages

For example, QuickBooks Online with Payroll can help you manage finances more efficiently by tracking payroll taxes, creating activity reports, and estimating employee-related expenses in advance.

Overdue payments to vendors

A sandwich shop owner typically pays for janitorial services and places monthly orders with produce, meat, and restaurant suppliers. They might have enough cash to pull through a slow season. However, if they lose a big commercial client who routinely orders food for resale in the company cafeteria, the owner’s cash reserves will be low, with vendor bills coming due.

With sales slowing down, the shop owner will have to prioritize shop utilities and food supplies. They might cancel the janitorial services, but have an outstanding bill to cover. What happens when their deli supplies and food service containers start running low, and they need to place another order with the restaurant supplier?

Payment problems can strain your business relationships, making it harder to get the capital or inventory you need when times are tough. If you don’t get a handle on the situation fast, you may have trouble maintaining or opening accounts with vendors in the future.

Think about the size of your cash reserves during a typical month

Do you have enough savings to keep operating for 30 days without additional income? Three months? Six months? A year?

Aim to build a cash safety net that’s at least two to three times greater than your operating costs. If it costs $2,500 a month to run your business, have a minimum of $5,000 to $7,500 readily available at all times. This allows you to fund your business for two to three months when your sales numbers look dismal. We’ll get into cash flow forecasting later in this post.

High debt and poor credit

A healthy portfolio of credit is necessary to show lenders that you run a stable business and use good money management practices. But relying too heavily on credit can send your debt skyrocketing while reducing your net income. Even as your business is doing well, you might still have trouble earning enough to live on.

With more cash moving in the pipeline, you can pay bills faster and avoid high interest and fees.

Another common pitfall is the habit of carrying balances that are close to your limit. High balances also prevent you from getting the most cost-efficient terms on loans and credit.

Paying with cash makes you evaluate and justify each expense

You need cash to take advantage of time-sensitive investments, such as acquiring another business, buying stock, or setting up distribution partnerships.

If you don’t have the financial flexibility to act immediately, you could fall further and further behind competitors. Of course, it’s possible to make large purchases with loans.

You need good credit to get funding on short notice

Be sure to keep track of your credit rating. Long-term success doesn’t just happen, it’s the result of strategic planning and using smart solutions that set up businesses for success.

Smart solutions to incorporate now

The two most valuable things small businesses can focus on when trying to stay on top of cash flow are using integrated business platforms and strategic planning.

Choose smart business tools to help with cash flow gaps

Technology and apps are a small business owner’s best friend, especially integrated platforms that have everything in one spot.

Using a software like QuickBooks, an integrated ecosystem of products that can track expenses, record invoices, and project earnings while constantly adding new features based on what is needed, will help small business owners streamline finances, keeping them on top of their business’s cash flow.

Likewise, apps like FundThrough offer temporary cash flow loans to Canadian small businesses by enabling you to borrow against your accounts receivable invoices. That way, you don’t have to wait until a vendor pays you to order more inventory or pay seasonal workers over the busy holiday season.

Consider short-term bank loans, too

You can also tap into short-term loans through your bank if you have a good credit score and collateral to borrow against.

Additionally, you can apply for a loan through independent online lenders like iCapital, OnDeck or Thinking Capital. They provide quick loans of up to several hundred thousand dollars, depending on your application, and offer fixed and flexible repayment options for small businesses.

Read our post on small business loans for more information on how to get a traditional loan.

Start building a financial cushion for the New Year

Some expenses are predictable. However, it takes careful money management to navigate the financial ups and downs of owning a small business.

By reviewing your current spending habits, you can identify ways to save money and lay the groundwork for financial wellness.

Look for free financial planning tools and self-employed advice from organizations that are invested in the success of small businesses, such as the Canada Business Network and the Business Development Bank of Canada. Outline your top business goals for the next 12 months so you can prioritize tasks that move you closer to funding these objectives.

Plan for the expected (and unexpected)

Smart planning better positions you to have cash flow available to say yes when opportunities arise. It also prepares you to withstand unexpected changes and fluctuations that could negatively impact your business.

Next, let’s look at how to forecast your cash flow as part of that planning process.

Prepare a 2019 through 2020 cash flow forecast

An accurate cash flow forecast is a critical tool that reveals the real-time financial health of your business. It measures vital metrics, like how much cash is coming in? How much money is going out? Are expenses creeping up? How accurate is your projection?

A comprehensive and precise forecast can answer these questions.

1. Don’t confuse small business cash flow with revenue

Both of these terms are Key Performance Indicators (KPIs) used to evaluate your company’s financial health. Revenue illustrates how effective your company is when it comes to sales and marketing, but cash flow is more an indicator of your overall liquidity.

Your small business cash flow includes revenue, but also sources of money outside your day-to-day sales. Your company often makes money in several ways that don’t rely on how you conduct your operations.

Revenue only measures the amount of money coming into your business with nothing else factored in.

Cash flow measures this also, but it also measures cash that flows into or out of your doors for other reasons. It’s different from revenue because there’s the potential for your cash flow figures to result in a negative value. If you suddenly lost a significant client tomorrow, would you still be able to keep your doors open?

Having a sufficient amount of cash means that short-term obstacles won’t get in the way of long-term goals.

2. Identify what’s coming in and what’s going out

While this might be obvious, you can’t run an accurate cash flow forecast without knowing the figures. This forecast details your company’s position in relation to what you have coming in versus what you have going out.

To begin, figure the amounts of cash coming in for the time frame you’re forecasting. Where is it coming from? For this equation, you don’t need to look at how much you’re able to produce. Instead, factor in the payments you foresee collecting for your products or services.

Looking at past years’ numbers for the time frame you’re forecasting is an excellent starting point. But don’t forget to take into account various factors, such as buyer confidence during that past period, as well as confidence in small business, especially if you’re reliant on business-to-business sales.

Opening up lines of communication with other small business owners can help you better gauge these levels of confidence giving you valuable insight into aspects of your company that can impact your figures, negatively or positively.

In your forecast, allow flexibility for any one-off payments that might come up in the future. These figures can include:

  • Purchases of business equipment
  • Training for new hires
  • Annual bonuses
  • Loan setup fees

If you’re unsure if any of these expenses might show up, it’s better to use your business savvy and include them as a safety precaution. This aspect of your cash flow forecast can also include surprise inflows of cash you weren’t expecting. A detailed estimation of your incoming cash flow might consist of:

  • Rebates and refunds
  • Additional capital from partners
  • Approved grants
  • Loans you gave are paid back
  • Sale of an asset
  • Royalties
  • Other miscellaneous fees

Once you prepare all the necessary data and decide on the time frame for your forecast, you need your beginning bank account balance for that period. This amount is also known as cash on hand.

Next, add all the projected inflows of capital and subtract the projected outflows. If you have a positive number, great. If not, you might have to readjust your planning for that period.

At the end of the period you forecasted, review your estimate against your actual cash flow. If anything in your forecast didn’t measure up, this gives you a vibrantly clear picture as to why.

3. Create scenarios

When you’re forecasting your future cash flows, imagining different scenarios can be incredibly helpful. For example, in 2018, Canada levied a tariff on steel products coming from the United States in response to a proposed 25% tariff on all Canadian automobiles coming into the United States.

Is your industry one that could experience the imposition of taxes soon? What would happen to your company if it did?

Say you’re the owner of a lumber mill and there’s a wildfire in the forests surrounding your area. That not only means you can’t cut any more wood until the fires have been put out. But, depending on your local zoning and proximity to the fire, you may not even be able to operate your mill.

Scenarios like these happen every day to unsuspecting businesses. Forecasting a cash flow model that includes unforeseen circumstances can help you avoid a reactionary scramble later down the line.

4. Gather the right input from the right people

Asking for advice from other small businesses like yours is one of the best ways to discern what changes need to be made to your current cash flow forecasting model.

Sometimes, what you’re already doing requires a bit of tweaking to ensure your forecast numbers are as accurate as possible. Some of the aspects of your current forecasting methods may be returning incorrect figures concerning:

  • Amount of data
  • Fluctuations in payables and receivables
  • Slow pay-offs
  • An unusually high amount of inventory

Keep track of your historical financial data

Like many small business owners, your time is probably split half-and-half – ensuring your customers are happy and making sure your staff is on the ball. Juggling these two aspects of your business means you might let your financial management fall to the wayside.

The only way you’re going to have accurate outcomes of your cash flow forecasts is by keeping track of your historical financial data.

What happens to your business in the summer? What happens before the holidays or around Boxing Day? Do you have a track record of purchasing too much inventory in the hopes of fantastic sales, only to have much of that stock remaining long after the holidays have passed?

If you don’t keep track of this historical information, projecting anything for the future can be difficult. Even just one year of data can suffice in most cases.

Watch for fluctuations in payables and receivables

If you base your forecasting on the average number of days it usually takes for each client to pay you, what happens if that client suddenly begins paying later than usual? It can wreak havoc on your figures.

If you have large accounts that you count on for much of your cash flow, it’s essential to monitor these clients more often than others.

The same can be said in reverse, as well. What if you usually pay your vendors every 15 days, but you decide to let a couple slide for just a bit? This can have an impact on your outflows and temporarily, aesthetically boost your numbers.

If you end up having an unforeseen expense before paying these vendors, it can mess with your bottom line.

Re-think slow returns on investment

There are many ways you can invest in your company, from purchasing new equipment to hiring new employees. The idea is that after a certain period, this investment pays for itself, and then begins to earn more money for the company.

However, new investments are sometimes very slow to generate returns, and some don’t ever entirely pay off the way you expected. Be wary when including these types of figures in your cash flow forecasts.

Avoid having an unusually high amount of inventory

This can happen for a variety of reasons, not the least of which is an overabundant purchase just before the holidays in hopes of making a killing.

If these products don’t sell, though, you’re left with stock that could drain your cash flow. Reviewing your inventory trends throughout the year can help you better analyze the amount you need at any given time of the year.

While it’s better to have too much rather than not enough, finding a happy medium can help your business thrive.

5. Monitor, Adapt, and Pivot

Finally, conduct either a direct or indirect cash flow forecast and adapt your cash flow strategy accordingly. The different approaches are outlined below.

Direct cash flow forecasting

This method of cash flow forecasting lets you manage your liquidity in the short-term. The aim is to illustrate how your cash moves into and out of your company at specified future dates.

To run this forecast, you typically enter payments and receivables as occurring on a specific day, or during a particular week or month.

Then the figures are combined to cover the length of time for which you’re running your cash flow forecast. For this method to be useful, your time frame should be 90 days or less, though some companies can successfully project as far out as one year.

Indirect cash flow forecasting

The indirect method is used when you create your budget as part of your planning stage. You use figures from income statements, balance sheets, and other essential accounting documents to project your future cash flows.

There are three different ways you can use indirect cash flow forecasting:

  • Adjusted Net Income (ANI): Calculates your projected cash flows from operating income figures with balance sheet changes and accounts payable and receivable factored in.
  • Balance Sheet (PBS): Use the ending data from a predicted balance sheet to calculate your cash balance for a future date; if all other accounts have been appropriately projected, your cash account is, as well.
  • Reversed Accrual Method (RAM): A hybrid of the above two methods that uses statistics to calculate the figures from both, reversing substantial accruals, thereby calculating how your cash flows in one specific period.

Forecasting your cash flows might not be the most fun task to perform, but it is vital. This process illustrates how much you’re likely to generate and whether funding future expansions is a good idea.

Your cash flow forecasts aren’t going to be spot-on, but over time you’ll notice patterns and be able to predict your company’s future with increasing accuracy.

Using an accounting system, such as QuickBooks Online, you can generate a Profit and Loss statement automatically.

We’ve got you covered

If you’re worried about cash flow, Quickbooks can help.

We’re committed to solving cash flow issues for small businesses and the self-employed by delivering services and features that help businesses get money as soon as possible. That includes everything from payments-enabled invoicing, same-day payroll services and loans up to $100,000 based on the data within QuickBooks.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

Related Articles

3 Essentials for Successful Cash Flow Management

Since cash flow is the lifeblood of your small business, understanding cash…

Read more

5 Tips for Managing Cash Flow for a Seasonal Business

If you run a seasonal business, you know your cash flow can…

Read more

5 Steps to Preparing a Cash Flow Forecast

An accurate cash flow forecast is a critical tool that reveals the…

Read more