Managing Cash: Canada
Finance professionals often say, “Revenue is vanity, profit is sanity, but cash flow is reality.” It’s an old adage in business, but it’s as true today as it was decades ago. As it was reported in our June 2014 survey, the American Express Survey of Mid-Sized Companies1, 84 percent of decision makers surveyed at mid-size Canadian companies said they expect cash flow issues to arise over the following six months. But it’s not just access to cash that’s keeping decision makers up at night—using smart cash flow management choices to fund growth is also a major concern.
No matter how healthy your top line may be, your next growth initiative could be short-lived if you’re not going above and beyond to maximize and stabilize your cash flow. Fortunately, there are a number of tools, tips, and best practices that may prove useful when preparing your business for major growth.
Make Accurate Forecasting a Priority
Canadian decision makers surveyed by the American Express Survey of Mid-Sized Companies1 identified their top three concerns with cash flow: collecting on accounts receivable (27 percent), accurately tracking funds (22 percent), and having enough cash to win new business (19 percent). Addressing these issues is critical for the health of any business—and doubly so for businesses looking to scale. If one or all of these concerns applies to your business, there may be no better place to start than by examining your working capital cycle.
According to Lee Swinerd2, this area can be a stumbling block for growing businesses. Swinerd is the Director of Turnaround and Transformation at KPMG U.K. and previously established the firm’s U.S. Restructuring practice in New York. As an expert in cash and working capital management, Swinerd has seen many mid-size companies underestimate the importance of developing accurate forecasts of their working capital cycles.
“They may receive 30 days of credit from American suppliers,” Swinerd said, “but when they’re working with suppliers in China, for example, that timeframe can be much shorter.” Meanwhile, Swinerd added that collecting receivables from enterprise customers can sometimes take up to 90 days—or longer. Swinerd stressed that accurate forecasting is critical for understanding how—or if—your business can finance a working capital cycle of that nature2.
To get additional help with understanding and managing your working capital cycle, consider a payment solution that extends payment cycles. It can help your business avoid overcharges and reduce costs, both critical factors for creating accurate and reliable working capital forecasts.
Change How You Think About Payables and Receivables
Once forecasting is done, consider rethinking how you’re distributing your payments to merchants and vendors. Prioritizing them by due dates and interest rates and structuring your payables accordingly can add flexibility to your cash flow. Think about utilizing a program or service to help your accounts payable department make the process more efficient. When pursuing receivables, make an effort to invoice quickly, and consider offering incentives for faster payment – but be cautious. Offering a slight discount for early payments may be effective for certain companies, but Swinerd cautioned businesses against offering such discounts indiscriminately. “For businesses with small margins, [discounts for early payment] may not make sense,” he said, “make sure your margin can cover it.”
Give Your Accounting Team Better Resources and Support
When it comes to smart cash flow management, the accounting team is your best resource so make sure they’ve got the tools they need to succeed. Start by looking at your team’s tech resources, and don’t settle for “good enough.”
One of the most common—yet easily fixable—causes of cash flow headaches is unreliable expense accounting. And for good reason: according to the American Express Survey of Mid-Sized Companies1, 25 percent of decision makers at Canadian businesses reported that their traveling employees find the best deal and book their own travel. This can be great for the travelers themselves, but it can be a nightmare when it comes to reconciling Travel & Entertainment. If this sounds familiar, try talking to your traveling employees about how they’re tracking and reporting expenses. You may also find that your expense accounting system is in need of an upgrade.
And don’t stop there - look beyond the immediate challenges and consider how improving your tech resources can make your cash flow more predictable and easier to manage.
Think Legal Before You Think Global
As the global economy continues to rebound, international expansion becomes increasingly attractive. But rushing into an overseas growth initiative without adequate planning can have serious implications on your cash flow.
If you’re thinking global, keep an eye on the progress of the Comprehensive Economic Trade Agreement (CETA) that Canada has been negotiating with the European Commission. Dubbed the “Wayne Gretzky of trade agreements”3, it’s designed to boost trade and create more jobs, and its implications can alter the way you do business.
When it comes to growth-focused cash flow management, there’s no need to lose sleep. Looking for opportunities to improve your processes and resources, giving your finance and accounting teams the best cash flow management tools, and learning the rules of the road when expanding abroad can go a long way toward making sure that your cash flow is capable of supporting your next growth initiative.
1. American Express Survey of Mid-Sized Companies: Subsets of the Middle Market in Key Areas by Revenue, AmericanExpress.com, http://about.americanexpress.com/news/docs/2014x/American-Express-Survey-of-Mid-Sized-Companies-US.pdf (2014)
2. Personal interview of Lee Swinerd, Director of Turnaround and Transformation at KPMG U.K., conducted by Contently Media LLC. (October 20, 2014)
3. CETA: Canada’s Economic Power Play in the Global Arena, cme-mec.ca, http://www.cme-mec.ca/?lid=JCKNC-E742G-1W6JA&comaction=show&cid=B9IMA-KRBHM-FZEI9
(Oct. 18, 2013)