Special thanks to guest author, Brant Friesen, CPA, CA, Performance Management Director, Rise Advisors

Managing your company’s cash position is critical. Running out of cash can spell immediate disaster for a company. Vendors do not get paid and in the worst of cases payrolls are missed.

A sudden drop in revenue or unexpected losses will not be catastrophic to a company when it has access to enough cash to ride out the storm. Having access to enough cash also saves the day when you land a whale—take on a larger than normal volume of business that puts a serious dent in your company’s cash position.

Managing cash flow is all about anticipation and a contingency plan. Like any business endeavor it’s a blend of art and science. In this case there are four steps to follow.

The 4 steps to managing cash flow

Step 1: Understanding your company’s cash patterns

Some companies have a positive or very tight cash pattern. A company that gets paid before it pays the costs (wages, vendors, etc.) required to perform work is an example of this kind of company. These companies take cash deposits before they incur expenses. Their cash pattern is positive, and they need a treasury program to manage cash deposits.

Some companies have a negative cash pattern. An example would be project based company such as movie producer or a construction company. Costs are incurred before billings are generated and collected. These companies will need to have cash re-invested in the operation or have an operating line with a bank to cover cash requirements.

Step 2: Forecasting outgoing cash and incoming cash

Outgoing cash is generally easier to forecast and flows faster than incoming cash. Outgoing cash, or outflows, are used for wages, rents, lease payments, fuel costs, insurance costs etc. Incoming cash is more challenging to forecast because it tends to be “lumpier” and more intermittent.

Step 3: Monitoring outgoing cash and incoming cash

With today’s access to digital banking platforms it’s very easy to see each day what came into a bank account and what left.

Monitoring the actual bank balance and reconciling to the forecasted bank balance can be done daily. This rate of frequency is not usually required to keep a handle on things.

Step 4: Establishing a relationship with a bank that understands your companies cash requirements and lends into your plan

When a company follows the first three cash flow management steps, they are set up for a bank to lend into their plan.

A tailored banking arrangement is the best way for a business to protect against not having the cash available that it requires to fund its operations. An operating line will cover the gap between collections from customers and paying operating costs. An equipment purchase line or lease line allows assets to be used in the operation that would not be available if they had to purchased with cash. Commercial mortgages allow companies to buy land and buildings when they do not have enough cash to buy them outright.

At Rise Advisors, we serve thousands of owner managed companies. For more than 40 years we have been designing ways to improve cash patterns, showing owners and their managers how to forecast and monitor cash flow and making the introductions and structuring the deals that make for the best bank relationships.

Give us a call. We would love to help raise your business to new heights! Brant Friesen, Performance Management Director, Rise Advisors. bfriesen@riseadvisors.ca 604-306-4718