Mom knew best.
“If you spend everything you have and then spend on the credit card, somebody's going to come calling,” says Bruce Chin, a chartered accountant and senior manager for private companies at the Toronto office of Deloitte & Touche, a professional services firm.
“Don't spend what you don't have and watch the leverage. I learned that from my mom – the hard way,” says Mr. Chin, recalling his university days when he spent his living allowance and racked up debt. That was his quickest lesson in managing cash flow, and one that applies to the businesses he advises today.
For many small businesses, the recent global financial meltdown provided another tough lesson: cash is king. That catchphrase refers not only to cash coming in to the business, but also cash going out, Mr. Chin says.
The biggest mistake small business owners often make, Mr. Chin says, is failing to pay attention to “the ins and outs and the timing.” He advises clients to ask themselves these questions: Do you have a good handle on your inflows and outflows? Do you understand their timing?
People tend to underestimate the time and effort it takes to get from making the sale to collecting the cash, he says. They don't have as much control over that cash flow as they think they do, adds Mr. Chin, who leads Deloitte's technology, media and telecommunications group in the Greater Toronto Area.
Entrepreneurs must balance where the dollars are spent with making sure the business has the funds to continue. Businesses fail if they don't understand their numbers and drivers, Mr. Chin says. If a business owner runs by the numbers but doesn't understand the quality of those numbers, that's a problem. An owner must stay on top of that, he says. For example, how aged are your receivables? Successful businesses stay close to their customers, understand them and work with them, changing the terms a bit for them if necessary.
In tough times, over-communication is an asset, both with customers and internally. Be clear with the people who handle the firm's money. For instance, receivables clerks could be empowered to give a 2-per-cent discount if they get a customer to agree to pay earlier, Mr. Chin suggests. Or a sales commission could be made payable to staff only after payment has been collected.
When there's an endless supply of cash coming in, small business owners tend not to watch what's going out the door, Mr. Chin says. And when the cash isn't coming in quickly enough, their first instinct, and sometimes their financiers', is to stop it from going out by delaying payments. Mr. Chin explains why that's dangerous.
In a knowledge-based company, employees are a company's biggest asset and payroll cannot be withheld, Mr. Chin says. The company might survive in the short run, but then what?
In the manufacturing industry, delayed payments may work in the short term. However, a firm that does so runs the risk of sacrificing relationships that have been built up over time. Or it can cause a chain reaction that puts a supplier out of business, cancelling a critical input.
Cutbacks also hold danger. To survive, businesses battened down the hatches, cut costs and went back to their core strengths. While there are no set rules about how much or what to cut, Mr. Chin says owners must realize where to stop because a business cannot cut its way to growth and sustainability.
