Small Business

5 Common Cash-Flow Mistakes and How to Avoid Making Them

These big blunders will leave you in a cash crunch. But money management doesn't have to be difficult

Written by Christina Pellegrini

When Susan Rohac assesses the creditworthiness of a prospective corporate borrower, it’s not uncommon for her to see an unpaid bill or two from four months ago. It’s usually from an untidy payable account. But not always. This time it was a 120-day-old receivable and the client on the hook was the owner’s friend.

“Oh, I know him very well,” the entrepreneur told Rohac, the senior vice president of financing and consulting at BDC in Ontario. “He’s going to pay.”

That decision might be good for their friendship, Rohac says, but it’s bad cash-flow management. And that can be deadly for a business. “That kind of blasé attitude is costing a lot of money,” she adds. That’s because every dollar in receivables is a dollar that either could have been earning interest in a savings account or been used to pay your employees. “One or two bad receivables early on in a start-up can really hurt a company.”

According to an American Express survey published in October, more than 84 per cent of Canadian mid-sized companies are expecting a cash crush in the coming six months. And their biggest concern isn’t that they won’t meet payroll or generate enough sales; it’s that they won’t collect what they’re owed. It’s not just the poor performers that struggle, as 66 per cent of survey respondents reported higher sales this year compared to last. The problem exists even when you’re making money, since your costs mount too.

Here are the five biggest cash-flow mistakes businesses make, and how you can avoid making them.

You keep horrible records

Keeping accurate, timely and organized accounting records is crucial if you want to know the financial health of your business at all times—and you should. Learn how to set up a cash flow statement or pay someone to do it for you. Update it with upcoming payment due dates and whenever you complete a sale. Then, make sense of the numbers.

“There is specific software designed for specific industries,” Rohac says. “Microsoft Excel, to me, is one of the least favourable systems,” but it is one of the most popular. A BDC survey of 881 Canadian business leaders conducted early last year, 55 per cent of respondents said they use Excel spreadsheets to track cash flow. Lior Zehtser is one of a growing number of accountants who are ditching paper-based records for digital ones that are stored in the cloud. At his Vaughan, Ont.-based firm, ConnectCPA, he uses Intuit’s QuickBooks Online software to track his and his clients’ cash position. Zehtser says the software is easy for non-financial people to use.

You don’t plan for payment delays

Cash flow is all about timing, specifically the timing of your sales cycle. It would be nice if you could align the timing of your payments with your receivables so money comes in before it goes out, but that’s not always possible. Let’s say you have a system in where you pay suppliers within 30 days and clients pay you within 60. All’s well, until your inflows are delayed by a week or more. Will you be able to keep the office lights on?

You need a cash cushion for emergencies. Exactly how much will vary, says Rohac, based on the results of a sensitivity analysis. Ask yourself, “What would happen if cheques from your biggest client were delayed by a week?” Make projections, review what did happen and revise future forecasts.

You splurge when you should save

Zehtser has a client in the lawn-care business who would rake in the cash in the summer and then spend lavishly on meals, entertainment and equipment he didn’t need, forgetting that the rest of the year is lean. With Zehtser’s help, the company transferred funds during peak time into an interest-earning savings account, which is now accessed only to cover wages and rent in the colder months.

You never say no to a sale

No two clients are the same, so why are you treating and billing them that way? “You’ve got to act like a banker and do your due diligence on your customers if you’re going to give them terms,” says Rohac. One of her clients performs regular credit checks on their clients. He even limits one company to $200,000 in credit and he’ll decline sales if the balance exceeds that amount. “If they’re not going to pay cash on demand, walk away from the sale. There’s nothing wrong with doing that,” she adds. Another one of her clients lets his receivables grow sky high. “That’s when they get burnt,” says Rohac.

You wait too long to get help

When you come across an accounting error, don’t wait until the end of the year to make it right. Call your accountant or hire one. Zehtser is doing corporate tax returns from someone in Alberta from as far back as 2008. “People tend to come to you a year or two after the fact,” he says. “It happens all the time.”


What cash flow mistakes have you made? Share your experiences and money management strategies using the comments section below.

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