Cash Is King


This article was originally published in the inFocus Spring '14 Issue.

As an entrepreneur either just starting out with a business idea or growing an already established business, it is easy to get buried in the big idea and neglect the administration or business details. Here I highlight three big picture ideas that any entrepreneur should keep in mind.

Working capital:

Working capital in the business is likely to be made up of several components. Effective management of cash and near cash items requires that each component, including the systems surrounding it, be reviewed to ensure that it is used optimally.

For example:

What credit terms are offered to customers; are different payments terms offered to different groups of customers; are discounts provided for prompt payment; are invoices issued as soon as work is complete. What is the process and policy for chasing overdue accounts; are credit limits reviewed periodically and adjusted as necessary. Are inventory levels minimized, are order quantities optimized for different products. Are corporate income tax instalments decreased where possible, based on expected earnings for the current year; does the company perform any work which is in nature research and development and may qualify for investment tax credits. Consider leaving profits in the business to avoid borrowing, or pay bonuses and loan the net pay back to the company; consider financing specific assets, such as factoring receivables or using SR&ED credits as security. Maintain a cash flow forecast:

Typically, insufficient time is spent on cash and cash flow forecasts while a business is getting off the ground. More often than not, the founder/entrepreneur takes more interest in creating and developing the idea.

Given the amount of cash required by many businesses to finance working capital, you should always monitor and manage cash closely. By identifying future financing needs early, management will be able to pro-actively seek additional funding or take corrective action before it is too late.


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