How to Master Small Business Financial Planning

Are you constantly operating at the top of your line of credit?  Are your trade accounts payable getting bigger and older?  Are you struggling to make payroll or pay the landlord at the beginning of the month?  Are you failing to remit GST and employee source deductions because you just don’t have the cash?  If only you had a bit more money!

In our experience, ‘needing a bit more money’ is a symptom of an underlying problem. The slide into insolvency is often a slow insidious process borne of poor financial management usually owing to a lack of financial information; the proverbial “death by a thousand cuts”.  Other times, the factors leading to insolvency can come on more rapidly; the loss of a major customer or a large receivable that is suddenly uncollectible.

All businesses have financial challenges.  Ironically, a successful business can experience similar cash flow issues to a less successful operation – usually just for different reasons.  If you find your business struggling financially, all is not lost.  There are typically five factors that are necessary for a business to weather a serious financial storm.  However, if you are missing any of these elements the ability to successfully turn the corner is significantly reduced:

What’s The Problem With Your Financial Planning?

First and foremost, you must be able to identify the issue(s) leading to your cash flow difficulties. Suffice to say, if you don’t know why you just need more money, that’s a problem.

Accurate, timely financial information is key in the early identification of financial issues.  We see so many small businesses get into trouble because they simply don’t place enough value on obtaining solid financial data which leads to poor decision making.  Get a good accountant involved and keep your business’ financial information up to date.  And learn to properly read your financial statements!

Can The Issue Be Fixed?

If the issue(s) can be identified, can they be fixed?  Some problems are simply not fixable no matter how much money you throw at them.  Virtually all businesses have a life cycle, and eventually you reach the end; the taxi industry in the Uber era or video rentals in the age of streaming.  Sometimes it’s just over.

Can You Fix It?

Do you, as the business owner, have the ability / expertise required to correct the problem(s) or will an external consultant or expert be needed?  It is important to understand your own strengths and weaknesses and know when you need to ask for help.

Do You Have The Resources?

Do you have sufficient resources available to correct the problem; namely money and time?  The earlier you identify the issue(s) the more time, and money, are available to take corrective action.  Having more time and money usually translates into more options. Conversely, as these run out, options quickly become limited.  It is important to take corrective action as early as possible.

Do Stakeholders Have Faith?

And finally, do you have the support of stakeholders (lenders, suppliers, landlords, employees).  They must have faith that you have the wherewithal to lead the business through these dark times and that better days lay ahead.  Stakeholders have a vested interest in seeing your business succeed.  Suppliers keep a customer, employees stay employed and landlords retain tenants.  That is always their preferred option.  But if you’ve abused their trust or they just don’t believe you have the skills required to lead your business through troubled times – they won’t continue to follow you.

Is There an Opportunity There?

Considering these factors, let’s say you believe you have the necessary ingredients to turn the corner.  Don’t just throw money at the problem – be strategic.  Look at this as an opportunity to take corrective action to improve your future business prospects.  Maybe this is an opportunity to get your suppliers to forgive some debt – or provide a longer term to pay it off.

Depending on the nature and extent of the problem(s) identified and the damage done, it may be time to consider restructuring.  Restructurings take two primary forms; informal or formal.

Informal restructuring could involve an arrangement to delay payment to your creditors for a few months until, say, the upcoming busy season when cash flows improve.  Informal arrangements are generally only possible with a small number of creditors. If too many creditors are involved, then all it takes is one dissenting voice to kill the plan.

If you’re dealing with many creditors or a particularly intractable problem then a formal restructuring arrangement, using federal insolvency legislation, is likely necessary.  A formal restructuring provides certain tools, such as the ability to stop creditors from taking legal action to collect a debt – while you remain in control of your day to day business operations – which can be critical to a successful restructuring.

Main Take-Away

You can’t run a successful business without timely and accurate financial information.  Don’t treat the accounting function as a necessary evil designed to help you fill in your tax return once a year.  Spend some time and money with a good accountant to establish a robust financial reporting system.  It’s worth it.

Here to Help

No matter what stage of business, or what problem you face, Small Business BC offers a range of seminars and one-on-one advisory sessions to suit any business.

View More Articles