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Cash Flows: The Vital Component

 The BDC conducted a cross-Canada survey of 881 managers of businesses of all sizes in 2014. The results were very clear, next to marketing and sales, respondents felt that administering their business was their second greatest challenge!

This is nothing new: knowing how to manage finances is essential to ensuring a thriving business. Cash flows are one of the most important items to analyze to avoid surprises. According to the BDC, poor cash management is one of the top causes of bankruptcy.

It sounds like a simple concept: determine cash inflows and outflows over a given period. Nothing to it, right?

And yet, even a profitable business could find itself in the red from time to time, for a variety of reasons. Sometimes, it’s something good that puts pressure on cash flows. For example, because of unexpected growth, the business has to start up four new projects over a short period, which could trigger a cash shortage.

There are two key considerations in this case: one, that it’s not something chronic, and two, being able to anticipate such situations.

Banks don’t like to grant an emergency loan to a company that wasn’t able to plan for difficulties. It’s a situation that doesn’t instill confidence! By preparing cash flow projections, you’ll know ahead of time when there are down periods and can plan your finances accordingly. By planning ahead, not only will you be negotiating in a calmer, more credible setting, you’ll have an opportunity to consider other options.

You’ll be able to plan how to replenish your cash resources in the event of problems before they occur. For example, liquidating unsold inventory can provide cash while freeing up warehouse space. If you’ve already determined what needs to be done, you can be more proactive.

Having an idea about your situation also lets you assess various business scenarios. What would be the impact on cash resources if you dropped delinquent payers? Or shut down one shift? You can make better decisions when you plan properly.

But it doesn’t end here, you have to monitor the situation. That way, you can react quickly if, for example, some costs are going up each month. You’ll be able to pinpoint the problem immediately and find solutions while you still have some maneuverability.

Lastly, sound management requires that you consider the long-term financing of assets while protecting your cash resources. It may be tempting to pay cash for new equipment. After all, you’ve got a surplus every month. Why pay interest? Because, by tying up your assets, you could find yourself in trouble if there was a sudden drop in sales: one of your major customers might decide to change suppliers or there could be an unexpected economic downturn.

It’s much easier to get financing with positive cash flow. You’ll also be more flexible and will be able to capitalize on new opportunities. Having cash resources provides strategic options.

It’s inevitable, money is at the heart of any business. It may not be why you’re in business, but you have to create value if you’re going to continue doing what you do best. One of the first steps toward success is sound cash management.

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