Update: 20-09-2023
Cash flow is your company’s lifeblood. How much do you need and how can you use it to its full potential?
Cash—also known as working capital—is used to pay salaries, maintain supply and repay loans. You need enough to ensure business continuity while waiting to receive payments and seize business opportunities on a timely basis.
«Needs vary depending on the industry and future plans, but generally speaking, keeping $1 to $1.2 in assets [receivables, inventory and cash] for each dollar in liabilities [accounts payable, debts] is a good starting point.»
- Lucien St-Amand, Vice-President, Banking Services, Desjardins
1. Create and maintain cash flow forecasts
A cash flow forecast predicts future cash inflows and outflows to give you an idea of how much cash you’re going to need in the future. For example, a seasonal business wanting to stock up on merchandise for spring may need to increase their line of credit well in advance.
2. Negotiate better credit conditions with your suppliers
Take a cue from large companies, which often demand incredibly favourable conditions from their suppliers. Instead of paying “net 30 days,” talk to your business partners about the possibility of getting 60 days without penalty or even a discount for prompt payment.
3. Pay using a credit card
That way you can pay your invoices as soon as you get them and maintain good relationships with your suppliers, in addition to benefiting from possible prompt payment discounts, as mentioned above. You can also take advantage of any cashback programs associated with your credit card, if applicable. Make sure to pay the full balance on your credit card before the due date to avoid steep interest charges.
«If your next credit card statement is in 30 days and then you have 21 days to pay the full balance, you’re pushing back cash outflow by 51 days.»
- Lucien St-Amand, Vice-President, Banking Services, Desjardins
4. Use other payment methods over cheques
Cheques often require 2 signatures and significant processing and mailing, which can cause your customers to be late with their payments. Instead, ask them to pay you by direct deposit, Interac e-Transfer, credit card or electronic payment (SWIFT).
5. Consider factoring your receivables
Factoring, also known as receivables financing, allows a company to “sell” its receivables to a financial institution. Once the file is approved, the company receives funds within 24 hours of receiving an invoice. There are slightly higher fees than for a line of credit, but you receive the funds faster compared to your usual payment terms (for example, 30, 60 or 90 days).
6. Use financing tools that match your needs
Avoid using short-term financing for long-term projects, like using a line of credit for an expansion. If cash is tight and your financial partners are unable to renew such a loan, your company could find itself in a precarious situation.
7. Learn more about the tools available to you
Use mobile deposit to cash cheques from anywhere. Import your account statements directly into your accounting software to automate bank reconciliation. Consolidate all your payments into a single file, regardless of their currency. Talk to your financial institution to find out which tools can make your day-to-day management easier.