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Many small business don’t have as much control over cash flow as they think they do, says Bruce Chin, who leads Deloitte’s technology, media and telecommunications group in the Greater Toronto Area. (Fred Lum)
Many small business don’t have as much control over cash flow as they think they do, says Bruce Chin, who leads Deloitte’s technology, media and telecommunications group in the Greater Toronto Area. (Fred Lum)

Cash controls

Stay close to numbers and customers Add to ...

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.

He says operators can learn from companies that streamlined with care: Know which employees are critical to your long-term success. Cutting too deep in a downturn can hurt the firm later. If cuts must be made, try to do them all at once so that the axe is not left hanging over workers' heads. Once the cuts have been made, rally the remaining troops and be open and honest with them about your plans. As things get better, celebrate and reward the people who survived, whether by promotion or company shares.

“People are people,” Mr. Chin says. “I've never seen a company grow with fear as a motivating factor.”

Now that the shift is returning to revenue growth, Mr. Chin urges his clients to focus on margins and profitability.

“If you've done it right through the downturn, you've got a solid base. You kept your top people and your efficiencies. From this base, ask where am I going to expand? What new products are we going to do?”

Try not to react to competition. Just because a rival is cutting its price, that doesn't mean your business should, he advises. Know what your value is and what you're good at. Spend time defining it and communicate it in a way that people can understand. Competing on price violates the margin. Don't do it, he advises. One high-end client Mr. Chin works with actually destroys inventory rather than devaluing it with a sale. Extreme perhaps, but the product retains its value, quality and cachet.

As the economy improves, it's also critical to review the business plan. It and the firm's mission statement may have been shaken to its foundations.

“You've got to rethink what you're going to do and how you're going to do it. The danger is that you think we're out of this thing and go back to doing things the way you did before. I still don't think that's true yet in a lot of industries. Things have changed. You've got to do things differently.”

How to improve cash flow

  • Build buffers of best and worst-case scenarios into financial projections, especially in a growing company. Determine fixed and variable costs and consider not only how to trim down, but how to scale up quickly with reduced resources should sales explode. Know ahead of time how to take advantage of an opportunity.
  • Limited resources force a firm to economize and jump-start innovation and creativity. In this recovering economy, don't lose that.
  • Go back to core values. Don't assume that the money is flowing once again and that a firm can afford to scatter attention to many different ideas.
  • Surround yourself with people who are smarter than you with more experience.
  • Continue to ensure that the firm works as hard as it did to survive the downturn.
  • Growth at any cost is over. Revenue growth is always front and centre but growth at a loss went to the back of the line.

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