When you crunch your numbers, it’s understandable to focus on sales, revenue and profit. To support success, yet another set of figures demands close attention your cash flow.
Without liquidity, businesses may be unable to meet their everyday financial obligations, cover shortfalls, service their debt or seize new opportunities. All represent huge risks.
At one time, it made more sense to keep money in the bank. “Now, when money is sitting at very low interest rates, it’s fairly unproductive,” says Brett Simpson, chairman of Vancouver-based Rogers Group Financial. “Look at what will allow you to invest long term and still have liquidity for the short term. That’s where you need the right banking tools.”
In looking at ideal cash flow, businesses should ask some fundamental questions. How much surplus cash do they have on hand? What are they doing with it? What is it earning? How else could they deploy it? If needed, how easy or difficult would it be to sell off an asset or investment? How can a line of credit or other facility help to meet business needs or pursue business possibilities?
“Borrowing tools and capacity can act as a buffer between the uncertainty of life’s events and the uncertainty of your portfolio of investment assets and your business,” Simpson says, “so you don’t have to sell something at a bad time.”
One key vehicle is a highinterest savings account for business, which should have at least some basic chequing and funds transfer capabilities. Look around too for some innovative newer products, like flexible commercial mortgages, which can work like credit lines.
Businesses shouldn’t just view their line of credit as an emergency fund or as a source to cover big-ticket items, says Mike Fralick, president of Fralick Financial & Insurance in Halifax. “It’s amazing how often we talk to businesses that have balances on their credit cards, paying 20% interest, when they already have a line of credit set up at 4%5% interest,” says Fralick.
Why don’t companies use that line for a wider range of expenses? In many cases, Fralick chalks it up to a psychological aversion to debt, or a desire to maximize room in the line just in case.
“There’s good debt and bad debt,” says Fralick. He calls good debt “an asset or expense that leads to income,” which could be anything from a piece of equipment to marketing costs.
When assessing cash flow, what is the number one ignored risk? Taxes, says Fralick: “Businesses don’t always account for their impact.” It may sound too obvious to be overlooked, yet budgeting for taxes can go a long way to maintaining an adequate level of liquidity.