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Keep an eye on invoices to avoid a cash flow crunch

Short-term financing, such as a line of credit, can be used to make emergency purchases or bridge the gap between month-end payables and receivables.

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Dennis Gariepy, principal of Edmonton-based MagCor Sheathing Systems Ltd., says he has "a wonderful product" to market – environmentally-friendly building panels that he pitches as more fire-resistant, water-resistant, mould-resistant, noise-resistant, rodent-resistant and sturdier than traditional drywall.

In the past year, his company has landed some solid institutional customers in British Columbia: school boards anxious to prevent field-mouse infestations in their portable classrooms, hospitals concerned with mould and wall damage in high-traffic areas, and group homes plagued by fires and vandalism.

The company is in talks with a major Canadian retailer that has expressed an interest in selling the product to contractors, Mr. Gariepy says, and has a good working relationship with the manufacturer of the panels, which are processed in China with magnesium oxide compounds.

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So what's there to worry about? It's the very issue that causes sleepless nights for many an entrepreneur: cash flow.

MagCor pays 50 per cent up front for each order it places with the manufacturer, and the remaining 50 per cent when the containers are loaded. MagCor's Canadian customers, however, have 30-day payment terms.

Those terms were manageable initially, when MagCor was shipping lower volumes. But as orders pick up in Western Canada – and with plans in place to push the marketing campaign eastward – "we will be dealing in higher volumes, such as 30, 50, maybe 100 containers a month. It has to be addressed because it's too much of a strain," says Mr. Gariepy, adding that the manufacturer – a Canadian-based company with a processing plant in China – is receptive to discussing the payment terms.

As a strategy for dealing with cash flow concerns, this is a good place to start, observes Karen Adams, senior vice-president and national head of business banking for HSBC Bank Canada.

HSBC routinely advises clients on cash flow management. "It's a common problem that faces every size of business," Ms. Adams says.

"You can have a really successful business that looks good on paper and is showing profit, but if you don't have the cash to pay your suppliers ... it's the [leading]cause of a business going under, not being able to meet your commitments," she says.

"There are a few strategies that we have found our customers use. Sometimes they involve banks stepping in and bridging the cash flow gap, and sometimes they involve just negotiating better terms with suppliers and customers."

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A company that has established a good payment record with its supplier – and is bringing in new business – might work out an arrangement to pay less up front and more on delivery, or in 30 days, or whatever the parties decide is workable, Ms. Adams said.

Small businesses often have less negotiating power with their customers, especially large buyers.

"Of course they want to make a sale, and of course it's a tougher call, but they can certainly go to those customers and try to get paid earlier, perhaps even provide a discount for early payment – so they give 30-day terms, but if you pay within 15 days, you get 1.5 per cent off, something like that," Ms. Adams says.

Mr. Gariepy says he will be able to reduce prices as his customer base grows and he is in a position to order enough from the manufacturer to qualify for volume discounts.

To this end, he and his business partner are constantly on the road in B.C. and Alberta drumming up more business. They are pitching to managers responsible for the maintenance of government buildings, schools, public housing and hospitals, talking to engineers, architects and project managers in the construction field – and making sales calls to retailers.

Diversifying the client base is one approach the Business Development Bank of Canada (BDC) recommends to reduce the risk of a cash crunch. "If you're not dependent on one large order or client, your livelihood doesn't hinge on the health of someone else's business," BDC says in an advisory paper on cash flow management. "Finding new clients will increase revenue, improve your cash flow situation and make you less susceptible to marketplace adversity."

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Short-term financing, such as a line of credit, can be used to make emergency purchases or bridge the gap between month-end payables and receivables; it is prudent to negotiate these options before the need actually arises, BDC says.

Ms. Adams said the most traditional approach is for businesses to ask their banks for an overdraft facility – "allowing your account to go into the negative up to a certain limit and then replenishing it as you get your cash in place."

But companies seeking overdraft protection, or any other type of credit instrument, should be prepared to undergo scrutiny.

"HSBC will always really get to know our customer, really understand fully what the cash flow cycle looks like, what the whole working capital cycle looks like, how long it takes to ship the goods, how long those goods typically stay in inventory. We look at the entire working capital cycle and try to provide solutions around it."

A lot of cash flow hiccups can be avoided by simply keeping tight control – issuing invoices as soon as the goods or services are delivered, and keeping close track of money owed. "For somebody who is just starting out in business, and cash is kind of tight, the last thing you want to do is wait until the end of the month until you get your statement in the mail," Ms. Adams says.

Mr. Gariepy says he and his business partner have invested "tens of thousands" of their own money, not to mention "sweat equity – you can't put a number on that.

"At this point, we can sustain ourselves," he says, but as the company grows, "we are looking at obtaining a financial partner."

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