All businesses experience market fluctuations. Periods of growth, and periods where business is more difficult. What matters is how you manage the cyclical nature of your business finances. Here are five tips to help manage your cash flow and keep your business financially secure through the down cycle.
- Prepare a What-If Budget. Every business should have an up-to date business and financial plan that includes at least two worst-case scenarios – one with a slight reduction in revenue, the other if something drastic occurs. Each should include an action plan to reduce costs to get you through to the next cycle.
- Set Money Aside While Earnings are High. This might include leaving some funds inside the business, or depositing money into your personal account to allow you to forgo taking a salary when times get tough.
- Keep a List of Discretionary Expenses. Every business invests in itself when times are good. While this makes perfect sense when revenues are strong, these are the first costs that should go when times are lean. The easier you can identify non-essential spending, the sooner you can begin the process of cutting back.
- Use Credit Cards with Caution. The use of credit cards is a very common financing alternative among small businesses today. They’ve become so popular that most financial institutions offer ‘small business’ credit cards with attractive features tailored to business use like cash-back incentives and expense tracking statements. The downside is that they carry excessively high interest rates and become personal debts when they remain unpaid, putting both your business and your personal finances at risk. Arrange a line of credit in the business instead and think ahead about possible sources of emergency funding for when it is needed.
- Keep Up with Your Taxes. It’s common for businesses that are having a cash flow problems to stop paying Canada Revenue Agency. They can’t stop paying their suppliers since they need access to goods and services. They can’t stop paying employees and they need to keep production up in order to meet the few sales they do have. They make only the minimum payment on their line of credit or credit cards to keep their credit current which helps a little but once they’ve reached their credit limit, something else needs to go and that’s usually withholding taxes and GST. There is a risk to this strategy, however. It’s hard to catch up. Outstanding income taxes, withholding taxes and GST are often the largest debt for unincorporated small business owners or self-employed persons who declare bankruptcy because while it seemed like a good cash flow management strategy at the beginning, it eventually becomes unsustainable.
Managing your money is important. Be prepared for the goods times, and the bad. It will keep your business afloat.