“Never take your eyes off the cash flow because it’s the lifeblood of business.” — Sir Richard Branson.

Avoiding complications by maintaining a healthy cash flow is critical for your small business. But it’s not always an easy thing to do. Unexpected incidents and expenses can crop up with little warning.

However, by mapping a plan to achieve a healthy cash balance, you can set your sights on long-term goals, such as expanding your business or investing in new ventures.

Maintaining a healthy cash flow and your business’s financial health includes having a comprehensive business insurance policy to cover expenses following an insurable loss, such as fire or water damage to your business, or dealing with a third-party bodily injury claim from a customer.

How small businesses can solve cash flow problems

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Zensurance - Small Business Insurance Guide

What Is Cash Flow?

Understanding the fundamental concept of cash flow is the first step in addressing cash flow challenges.

Cash flow is the movement of money (including revenue and expenses) in and out of a business over a specific period. While positive cash flow means incoming cash is greater than outgoing costs, negative cash flow means spending more than earning.

Do you want to be able to manage unexpected business expenses, keep your business on plan, fund expansion and growth, and be able to go to bankers, lenders, and investors to finance your business? Of course, you do.

Efficiently managing your cash flow is vital in guaranteeing that you have sufficient funds to cover your business expenses for long-term sustainability. If you are interested in future growth, know that businesses that can manage their cash flow effectively and are profitable are more likely to secure financing from banks, lenders, and investors, which can fuel potential expansion and growth in the future.

What Causes Cash Flow Problems?

Cash flow problems are customary for many small business owners — but you can proactively manage them by being aware. Let’s dig into what that can entail and what causes some of the most common cash flow problems for small businesses in Canada.

Sometimes, it’s just a matter of your positive thinking and assumptions, such as:

  • Startup costs: Neglecting to consider the full extent of startup and overhead costs and overspending at launch.
  • Expenses: It’s important to distinguish between necessary and optional expenses and make strategic capital expenditures to improve cash flow, as committing to costs that aren’t necessary or making poor strategic investments can lead to problems (e.g., needing to sell more to break even, impacting profitability). Not knowing how to solve cash flow challenges caused by inflation can also decrease your purchasing power and increase your operating costs.
  • Savings: You may not have enough saved to cover expenditures.
  • Expectations: It’s important to remember that building a profitable business takes time, so it’s essential to be realistic about the timeframe. Expecting profits too early and not having adequate cash requests causes cash flow issues. 

Other causes of cash flow issues are:

  • Growing too quickly may cause your business to experience a cash shortage to cover employee wages if it lands a large client contract that requires hiring extra staff without receiving payment from the client.
  • Poor financial management can also lead to cash flow problems, as failing to monitor cash flow and manage expenses regularly can cause issues. 
  • Seasonal or irregular sales patterns from fluctuations and inflation may cause cash flow issues during the slow season. 
  • Slow-paying customers can be a problem if a company doesn’t focus on accounts receivable or has a process where credit is only extended to customers with a history of making on-time payments. Inflation magnifies this issue, possibly further delaying receivables.
  • Low-profit margins arise when you don’t review and track this metric over time and may indicate high costs or low pricing, leading to cash flow issues.
  • Unexpected expenses (broken equipment, a customer going bankrupt) can disrupt cash flow.
  • Overpaying taxes instead of planning and forecasting. Neglecting to monitor cash flow means that new (and even some established) businesses cannot anticipate and prevent the cash-flow-related issues above.

Tips for Avoiding Cash Flow Problems

You must be proactive when attempting to prevent cash flow challenges and, as always, must adapt your approach to the Canadian business landscape.

Identifying the root causes of your cash flow issues is essential for implementing intelligent solutions. To do so, take the following steps:

  • Track your cash flow: Using a spreadsheet or accounting software. Calculate your cash flow cycle to identify problems early on and improve business efficiency.
  • Create a comprehensive budget: Include all expected income and expenses. Accounting software can assist you in creating budgets, sending invoices, and generating reports to aid in making better business decisions. That will also help you plan and ensure you spend appropriately, including all expected expenses such as payroll, rent, inventory, and marketing.

How to Avoid Cash Flow Problems in the Future

You can follow our tips for managing cash flow during slow business periods and embrace several practices in your day-to-day business to ensure a brighter cash flow future.

Begin with optimizing invoicing and payment collection processes by:

  • Sending invoices promptly. Dispatch invoicing once a job is complete or the delivery has occurred. 
  • Incentivizing quick payment. Offer customers a discount for early payment.
  • Directing focus on the receivables process as soon as an invoice ages.
  • Credit check your customers.
  • Make paying easy. Adopt an online invoicing platform like FreshBooks, QuickBooks, PayPal, or Zoho. These platforms offer features like automatic reminders for unpaid invoices and recurring billing, which can help ensure consistent cash flow.
  • Use a payment system. There are several platforms that they can use to receive payments efficiently. Popular options include Interac e-transfer, credit card payments through Moneris, Square, or PayPal, mobile wallets like Apple Pay and Google Pay, online payment gateways like Stripe, automatic clearing house (ACH) payments, cheque scanning and remote deposit, invoicing and billing software, point-of-sale (POS) systems, and bank transfers.

Next, you can tackle your accounts payable. Negotiating with your suppliers can achieve favourable extended payment terms. Also, consider leasing expensive equipment rather than buying it outright to reduce payables. Practice effective inventory management by selling slow-moving items at a discount and instead focusing on investing in stock with success potential.

Fiscally, prioritize developing a financial cushion for unexpected expenses and using high-interest savings accounts. You can also cautiously consider a line of credit to cover a short-term cash flow shortfall if those additional expenses aren’t feasible — but remember, it can add to your debt load.

Lastly, consider hiring financial experts such as accountants and planners. While this may seem like an added expense, it can ultimately save time and money in the long run. Prioritizing these actions can help small businesses avoid cash flow problems and maintain financial stability.

Cash Flow and Profit: What’s the Difference?

Although cash flow and profit are connected, they are not interchangeable terms. 

Cash flow measures the movement of money into and out of a business during a specific period and is reported on the cash flow statement. On the other hand, profit is reflected in the income statement and measures the money left over after all expenses have been paid.

The main difference between cash flow and profit is that cash flow is a real-time measure of money in and out, while profit is a measure of money remaining after expenses have been paid.

Another difference is their differing levels of volatility since cash flow is influenced by various factors that can vary from one month to another, such as customer payments, inventory purchases, and capital expenditures.

A business can be profitable without having positive cash flow, and vice versa. If a business has a lot of sales on credit, waiting 30 to 90 days for payment while covering expenses like rent and payroll can lead to positive profits but negative cash flow. Investing in new growth opportunities can lead to positive cash flow but negative profits.

cash flow and profit are important for a business, with cash flow being crucial for paying bills and profit being essential for long-term growth and survival. If you can understand the difference between them and work on ways to improve them, you’ll have a better chance of success.

How to Increase Your Cash Flow

Above, we listed several tips for avoiding cash flow challenges, including tracking cash flow, creating a budget, optimizing invoicing and payment collection, negotiating with suppliers, managing inventory effectively, having a financial cushion for unexpected expenses, and, if necessary, considering hiring financial experts for stability.

Implementing any or all of those tips takes you on a straight path toward increased cash flow for your business. If you’ve already done this and are experiencing cash flow challenges, here are some actionable steps Canadian small businesses can take to increase cash flow:

  • Revenue generation: Ramping up sales and marketing efforts, introducing new products or services, targeting new customers and markets, and raising prices can all boost revenue.
  • Expense management: Negotiating better terms with vendors to give you more time to pay, cutting unnecessary costs, reducing expenses such as marketing and subscriptions, and renegotiating contracts can also help manage costs.

How Insurance Supports Your Small Business’s Financial Health

Insurance can help small businesses and startups protect their financial health. It plays a significant part in maintaining cash flow when the unexpected happens. For example, business interruption insurance can cover your operating expenses if you’re forced to temporarily close your business for repairs following an insurable loss, such as a fire.

Business insurance is a prime example of an expense worth the cost and can even save you money in the long run. It safeguards your business from unexpected events that may occur during daily operations.

Fill out our online application for a free quote. We can find the low-cost policy you require and tailor it to suit your small business’s needs.

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About the Author: Alexandria Anthony

Alexandria Anthony is the Team Lead, Property & Hospitality, at Zensurance.