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The keys to mastering your business’s cash flow

Dionne Laslo-Baker of DeeBee’s SpecialTea Foods Ltd. has each department come up with a cash-flow forecast that looks three years ahead.

Chad Hipolito for The Globe and Mail

Cash flow is important in any business, but for small-to-medium-sized companies, it can be the difference between surviving and shutting off the lights for good. Small businesses are continually looking for ways to conserve cash to meet payroll and fulfill orders to keep customers happy, and coming back. The Globe and Mail spoke with experts and small-business owners to come up with five strategies that small businesses can use to stay afloat and eventually expand their companies:

Make a cash-flow forecast (and stick to it): The biggest mistake many small-business owners make is not keeping track of what cash is coming in and going out, says Robert Hunt, a chartered professional accountant, licensed insolvency trustee and partner at Grant Thornton in Halifax.

"The timing of those inflows and outflows is critical to ensuring the company doesn't run out of cash," Mr. Hunt says. This is especially important for a seasonal business, such as a beachside restaurant or a retailer that sells more products during the Christmas holiday season. These businesses usually buy their inventory months in advance, and need to balance their books accordingly.

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To keep from running out of cash, Mr. Hunt suggests using a line of credit with the bank or setting out longer payment terms with suppliers, when possible. "Part of the art of this is managing all of the sources of your financing," he says.

At Victoria-based DeeBee's SpecialTea Foods Ltd., each department has to come up with a cash-flow forecast that looks three years ahead. Chief executive officer Dionne Laslo-Baker says the exercise makes each division more accountable, and managers often come up with creative ways to save and spend. "Instead of trying to keep up with the budget all of the time, we're ahead of it," she says.

Manage accounts receivable (and get your money faster): When money is tight, work harder on getting the money owed to you, which is called the accounts receivable.

Mr. Hunt recommends focusing on the bigger clients first, even if the invoices from smaller ones have been overdue longer. "I'd rather they focus on collecting a large receivable that is one day over its payment terms than a whole bunch of little ones that might be 30 days or more. It's the biggest bang for your buck," he says.

He recommends a polite approach when contacting the supplier, by asking if there was a problem with the service that has led to the invoice being overdue. "Being pro-active on those accounts receivable goes a long way to ensuring that any problems are identified very quickly. The outcome might be that you'll collect faster in future," he says.

When looking to collect an overdue invoice, John DeHart, co-founder of home-care services company Nurse Next Door and Live Well exercise clinics, recommends calling clients instead of sending an e-mail. This is especially true when collecting from big companies. "Most of the time, they have no idea that their two or three thousand dollars means life or death to a small business," Mr. DeHart says. "As soon as we start to explain that to them, we are the first ones paid because they know how much it means to us. It's so amazing when you personalize it a little bit. It can make a big difference."

Manage your inventory better (it's not just about having a sale): Some products don't sell as quickly as you would like. Experts recommend a regular review of inventory, and then making shrewd decisions on when to discount them to try to get them off the books.

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"It costs a lot of money to have inventory sitting on the books, in your warehouse and on your shelves," Mr. Hunt says. "If it's not turning it over as quickly as it should be, then you may be paying financing costs and it may be limiting your ability to get credit or financing."

Try not to buy too much inventory either, which may be easier said than done. Alan Gertner, co-founder of Tokyo Smoke, an international coffee, clothing and cannabis company, says they rely on data and analytics to track inventory and tell staff what to focus on.

They also consider store placement. For instance, if ashtrays sales are slow, it could be their location in the store, not the product itself. "It helps us to manage our cash flow and make more money, not to mention offer better products for our consumers," Mr. Gertner says.

Manage your different types of debt (and know the difference): Most businesses, as they grow, need to borrow money to buy inventory, equipment or even real estate to run their operations.

Mr. Hunt says small-business owners need to make a distinction between short-term and long-term borrowing needs, which will have different terms and interest rates. Short-term debt is often used to buy inventory that can be sold in the near term, whereas long-term debt should be for buying assets such as machinery that are used over several years.

Mr. Hunt says a mistake many businesses make is paying for long-term assets out of working capital, which is money used in the day-to-day operations. "That puts serious pressure on their lines of credit or other working capital," he says.

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Manage employee costs (and make them more productive): The biggest cost for most companies is employees. Most businesses can't run without people, but the key is having the appropriate level of staff, and also calling on them to help you save money.

At Live Well, for example, Mr. DeHart says staff are called on twice a year to find ways to shave costs. "If you are the owner, you don't know everything. But when you empower your people to look for the savings, they know their jobs best and can come up with tips," he says.

One employee figured out a way to save the company $2,400 a year by eliminating four paid parking spots. Another figured out how to save hundreds on phone bills by using a phone service over the Internet.

The company also offers incentives for staff who help to cut their travel costs, by giving employee half of what they saved on expenses. For example, if the travel budget is $1,000 and the employee spends only $800, he gets $100 – or half of the $200 savings. "The best thing is, you find out where all the fluff is in the budget and you now know how to budget for next year," Mr. DeHart says.

The Globe and Mail's Risk Takers is a podcast about the entrepreneurs who risk everything to grow their businesses. Listen to learn from mistakes made and opportunities seized. Learn more at tgam.ca/therisktakers.

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About the Author
Contributor

Brenda Bouw is a freelance writer and editor based in Vancouver. She has more than 20 years of experience as a business reporter, including at The Globe and Mail, The Canadian Press, the Financial Post and was executive producer at BNN (formerly ROBTv). Brenda was also part of the Globe and Mail reporting team that won the 2010 National Newspaper Award for business journalism. More

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