Managing and Maximizing Your Business’s Cash Flow.

Managing And Maximizing Your Business's Cash Flow.



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There are scores of people who dream of owning their own business and the suggested freedom that comes with it.  These people get excited with the prospect of  anticipating profits and a lifestyle over which they have a certain amount of control compared to the corporate grind that they’ve lived in for many years.

However, in order to realize this type of success, both financially and in terms of lifestyle, business owners need to have a definitive and disciplined approach to profitability and cash flow management that can serve as a stepping stone - or guidepost - to the realization of their business dreams.  This article addresses what new, and sometimes, seasoned, business owners, need to be monitoring in order to realize success and profitability in their businesses.  This is not an exhaustive commentary on what makes a business succeed, but certainly highlights issues that business owners need to address in order to build that successful business that they are all after.

There are 3 underlying components that determine the financial success of any business operation.  Those are:


  1. Profitability
  2. Return on investment
  3. Solvency


This article addresses point #3 – Solvency.  Numbers 1 and 2 are addressed in other articles.

As you know, this word addresses the business’s state of liquidity (ie: is there enough cash in the bank to sufficiently cover the business’s expenses, provide residual financial resources for additional working capital needs, and - possibly -provide ownership with additional compensation).   Profitability does not mean much if you can’t collect on your accounts receivable and deposit the money in the bank; similarly, without collecting payment from your clients, your return on investment is going to fall far short of your initial dreams.

For your business to work, you need to increase your bank balance.  Not only that, it needs to increase at a level that justifies your efforts – that’s worth operating a business for!

Your business’s cash flow can be affected either with your cash inflows or your cash outflows, so let’s look at both of these areas in more detail:


Managing Cash Inflows:

If you think about the things that can affect the inflow of cash into your business, then you have a skeleton template of the areas that need to be monitored in order to maximize your cash inflow.  Areas that affect your cash inflow are:


  1. Revenues
  2. Accounts receivable management
  3. Strategy implementation
  4. Seasonality of business


There may be other words that can fit on this list, but invariably they would fit into one of the 4 items listed above.  Depending on your business, let’s assume that the percentage net income before taxes usually circulates around 20%.  If your net income level is below this threshold, then you need to look at not only expenses (ie: cash outflows), but also revenues.  You regularly need to ask yourself, am I consistently executing a marketing plan that will result in increased revenues?  Am I collecting on my sales/ services?  Is my Accounts Receivable balance within acceptable levels?



Everyone reading this article will agree that it’s no use talking about managing cash flow if you don’t make sales in the first place.  Generating revenues in today’s competitive economy means generating recognition and trust.  You won’t make a sale the first time someone hears from you, but the more they do hear from you, the more you are recognized in their minds as a competitive merchant worthy of their disposable income.  You need to have a strong business strategy in place as well as a strong marketing strategy that complements that business strategy and that will facilitate its’ success.


Accounts receivable management

Revenues and growth will not amount to much if you cannot collect on your receivables.  Some businesses are primarily cash-based.  But for those operations that accept credit, you need to have a monthly, and in some cases weekly, monitoring of your accounts receivable to ensure that you’re collecting on those invoices.  It’s very easy for accounts receivable to get out of hand and seriously impair the cash flow of the operation.



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Strategy implementation

This point is important because it determines revenue growth, which then drives accounts receivable collection.

Regardless of the business and industry in which you’re involved, strategy implementation is key to growing your business and realizing business success.  In many cases, however, the strategy considers the type of client desired in order to maximize cash flow.  This is why your cash flow management process begins right at the point of building your business plan.  Contrary to how many people approach business, you can’t think of your business one-dimensionally – trying only to make sales, and that’s it.  There are many other areas that need to be systematized in order to run effectively and efficiently and, ultimately, produce a cash-generating operation.


Seasonality of business

An important consideration in the discussion of effective cash flow management is the seasonable nature of your business.  During the down season, your business will spend more money than it will bring in.  Business owners usually deal with this issue by either utilizing credit facilities and then paying them off during the busy season, by cutting operating costs, or possibly a combination of those 2 methods.  Regardless, business seasonality forces you the business owner to carefully manage your cash flow by ensuring that you minimize your cash outflows and possibly create new revenue streams to offset the temporary downturn in your business operations during that time.


Managing Cash Outflows:

When discussing how to effectively manage cash outflows, we usually look at the income statement and balance sheet and see where we can minimize costs.  This is certainly true; however, unnecessary cash outflows can result in other ways.  The main areas of cash outflow management are the following:


Operating expenses

  1. Wages
  2. Wastage
  3. Lease
  4. Financial internal controls


Operating expenses

It’s a good idea to have your financial statements prepared with a comparative column for the previous year as well as a “common-size” column showing the percentage of revenues that each particular expenses draw takes.  This percentage column quickly points out expense items that may be drawing too much from the money pool.  Look at these expenses monthly, or weekly to keep close tabs on how your business’s money is being spent.  Quick tweaks are sometime essential to maintaining effective cash flow management.



Wages are normally the biggest single expense of any business, followed by leasing costs.  Effective cash flow management always involves close monitoring of your wage costs.  Always make sure that your employees are being fully utilized and that there is no “wasted” employee time.  If you find employees standing around too often, this may mean overcapacity in your human resources and unnecessary cash outflows.

It’s amazing what business owners can learn and how their operating methods change once they realize the money that is being wasted through subpar work practices by employees on incorrect operating procedures.   For business owners wanting to maximize their cash flow, they need to regularly track wastage expenses.  Such tracking may very well lead to the creation of updating of employee manuals and practices, since it is employees who perform daily tasks that can lead to the wastage of items within the business.



After wages, this cost is usually the second largest cost incurred by the business.  We all know, however, that this cost has to be offset against any competitive advantage that may be secured because of any premium paid on a lease, such as location, access to suppliers, or networking advantages.  The decision of leasing costs usually is unique to each business, and the business owner needs to recognize the requirements of his/her individual business and how a leasing space can facilitate those requirements.  If the business owner has confidence that the potential increase in business, networking opportunities, and access to clientele will outweigh any lease premium paid in relation to other possible locations, then it may be a prudent business decision to decide to pay the lease premium.  Leasing decisions should not be guided solely by cash flow management parameters.


Financial internal controls

Last but certainly not least, financial internal controls are the last (and sometimes strongest) defense against sub-optimal cash flow management.  Policies, procedures, and monthly checklists designed to properly manage and monitor cash inflows and outflows are essential in properly managing your business’s cash flow.  Monthly checklists that force personnel to calculate wastage, assess whether or not employees have performed their duties to required levels, or investigate whether financial transactions have been properly approved, will prompt the business owner to correct any weaknesses in the operating process that lead to poor cash flow management – in other words, such procedures expose problems and force the business owner to “right the ship”.


Ultimately, cash, not profitability, will determine whether or not a business will survive or fade away.  It’s always better to refrain from additional revenue generating activities until the operation can perform optimally at each level of profitability.  Optimally here is defined as operating effectively with an internal control system that monitors costs and ratios to ensure that the business remains solvent at each level of profitability.  When your business is running well at each level of profitability, you can be confidant that your cash flow is optimal and that the business is ready to add more revenue.



Nicholas Kilpatrick is a partner at the accounting firm of Burgess Kilpatrick in Vancouver, B.C.  He concentrates his practice on assisting business owners with accounting services, tax and estate planning and overall business development.






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