This golden rule can apply to just about any aspect of running a business, from communicating with staff to dealing with customers and suppliers. But it is just as vital to the relationship a business owner has with their banking institution. When the market sours, the bank can be the lifeline that means the difference between throwing in the towel or hanging on until conditions improve.

Too often business owners engage in a purely transactional relationship with their bank to serve the day-to-day and monthly needs of their business. The bank may have a poor or limited understanding of the business, the markets its serves and the typical cycles it endures. When the business is struck by tough times and finds itself going hat in hand to the bank to secure credit or re-negotiate the terms of a loan, it may not find the help it needs.

It is always more difficult to solicit sympathy – and more importantly, help – if you wait until the situation is desperate to begin the conversation. Banks want to mitigate risk and ensure their investment in your business will not end up accounted for in their loan/loss provisions. Your desperation makes them nervous.

To establish a positive relationship with your bank and ensure the help will be there when you need it most:

• Understand how your bank works. Most banks have a range of services tailored exclusively to businesses of various sizes and scope. Understand where you fit as a business customer and who has responsibility and decision-making authority over your account. Not just the title of this person, but who they are by name.
• Get to know this individual. Sit down and discuss your business with them. Often, this person will be more than willing to pay a house call and discuss in detail your business and its current and future needs.
• When times are good, secure a line of credit. Build a track record as a reliable customer by regularly drawing on it and consistently paying it down.

Keep your bank honest

On the other hand, your bank is in business to serve you, the paying customer. Approach this relationship with the legitimate expectation that you deserve and can expect attentive and courteous service. You do have the right, at any time, to take your business elsewhere.

Our banking system is typified by a fee-for-service structure. Businesses in particular are on the hook for Visa/Mastercard merchant fees, points rewards plans and other costs which nibble away at margins. Beyond these are the fees associated with everyday banking transactions, the interest rates on credit cards, and of course, the cost of borrowing through a line of credit or a loan.

Most if not all of these costs are negotiable to some degree. Having established that track record as a good customer through timely payment of your bills, combined with years of loyal patronage, deserves to be rewarded with better rates and reduced, if not waived, fees.

Banks, however, are often slow to offer such rewards unless you make a point of asking for them. Don’t be afraid to shop around and see if you can find more competitive terms elsewhere that you can use as polite, but firm, leverage. Your bank, just like your own business, should be willing to give a little to keep a good customer rather than have to find a new one.

As a business that may be struggling, or proactively looking at ways to cut costs and improve cash flow, there are few respites from one’s tax obligations. Simply put, government at any level is a tax collector – taxes are, after all, its principal source of revenue. This applies in good times and bad. If you’re a business today in Windsor, for example, where the tribulations of the auto sector are having a profound impact on the local economy, your taxes will be due regardless of whatever damage is being dealt to your bottom line.

There is no substitute for meeting your tax obligations in a timely and consistent manner and adopting a policy of good corporate governance by providing full disclosure, regardless of the scale of your business. If you are honest and forthright with The Canada Revenue Agency (CRA), it will be much more inclined to be fair and co-operative with you.

For businesses that have a risk of being in arrears, CRA does offer a Voluntary Disclosure Program. This program allows taxpayers to come forward and correct inaccurate or incomplete information or to disclose information they have not previously reported. If you are in arrears, you still have to pay what you owe plus interest, but you will avoid any other penalty or prosecution.

Various professional tax specialists also offer intervention services on a taxpayer’s behalf to apprise CRA of a particular situation and negotiate a settlement and a schedule of repayment to protect the taxpayer from punitive penalties or prosecution.

Tax Saving Tips

While there is no magic wand that will make one’s tax obligations disappear, there are a number of modest options a business can consider to mitigate or temporarily defer taxes in certain circumstances. However, these options often carry consequences and a business must discuss with a tax professional if the short-term benefit is worth any long-term implications.

These include:
 
Loss carryback

If you incurred a non-capital loss in your current fiscal year, or did have a loss last year, you can carry this loss back and apply it against a profit you made in any one of your previous three tax years. Applying this loss against a profitable year will provide a refund of some portion of the taxes you paid in that year. This refund can be used to boost your cash flow or otherwise finance your business. Note that this loss can also be carried forward a maximum of 20 years.

More information on carrying non-capital losses forward or back can be found on the CRA website.

Reducing income tax instalments

As a business or self-employed individual, you must pay income taxes by quarterly or monthly instalments. Many taxpayers elect to pay instalments that are based on the level of income their business earned in the previous tax year. But if you are having a weak year, this means you are paying more tax than you will owe for the current year. To preserve cash flow, review your instalments and see if it makes sense to reduce them.

The potential downside of this is that if business picks up in the remainder of the year, you may be now paying too little tax and will have to make up the difference, as well as pay interest, including instalment interest, on the outstanding tax owed.

Again, CRA’s website has more information on tax instalments.

Outsourcing services to reduce payroll costs

Typically, contractors are less costly than employees. The business does not have to carry, collect and remit employee costs such as Canada Pension Plan and Employment Insurance premiums, or provide vacation pay or provide group benefits.

On the other hand, contractors are less accountable to the employer beyond the immediate scope of work contained in their contract, and there may be less continuity for the business. Also consider and consult a professional about potential legal and CRA ramifications of switching employees to contractors if they are in essence still carrying out the same work and responsibilities.

Bonus out option

This avenue can provide a few months of breathing room for a business challenged to pay its corporate taxes on time. Rather than have the business owner draw a full salary from the corporation, pay out a portion of it as a bonus instead. The business can claim a deduction on this and the bonus must only be paid out within 180 days of fiscal year end. The payroll deductions at source are due by the normal remittance date, typically the 15th of the following month, after the bonus is paid.

Paying dividends in lieu of salary

Source payroll deductions can be avoided or reduced by paying dividends rather than salary, which will generally be taxed a lower rate. Dividends can only be paid to shareholders, so this will not apply to the non-shareholder employees. However, income in the form of dividends does not qualify as earned income for RRSP purposes, or as pensionable earnings, since no CPP contributions are being made. But again, this can be a short-term option to help preserve cash flow.

Incorporation

If you are in a situation where you are the sole proprietor of an unincorporated business, and are experiencing a very strong year, incorporating mid-year can defer the tax liability. A corporation also has the advantage of being a recognized entity, reducing the personal liability and exposure of the individuals involved in it for any debts or arrears incurred by the business. On the other hand, this can be a costly process and does carry higher annual administrative costs and create more paper work each year related to tax filing compared to remaining unincorporated.

The Issue

You’ve been in business for a few years, maybe longer, and have been rightfully focused on building it up and growing sales. You know you have been successful because there is always money available at the end of the day. But growing sales is only one side of the profit coin – the other is management and control of costs and expenses. Managing and reducing costs to optimize profit margins gives you a competitive edge, and especially when times are tough, better leverage.

Businesses that take steps to ensure their operations are as lean and efficient as possible in tough times are not only more likely to survive, they will emerge that much stronger when conditions improve. But to understand where there may be fat to cut, you must first understand your cash flow and your financial business model – what your business looks like in terms of revenues and costs.

What to do?

For starters, get your accountant to provide you with a Profit & Loss (P&L) statement and identify and explain what flows into each line/cost item. Challenge everything and anything. Does each item make sense to you and align with your understanding of your business? Do you understand what are fixed costs, variable costs, direct costs and indirect costs? What ability do you have to influence them – in the short term, in the long term?

• Look at ratios, percentages and margins. Review labour costs as a percentage of sales; cost of goods sold as a percentage of sales and gross margins. Regard ALL line items as a percentage of sales. After all, it is your sales that pay the bills for everything else in your business.
• Perform a trend analysis on historic data with side-by-side comparisons of spreadsheets that show P&L, with the ratios and percentages, for each year. Look for any changes in ratios over time, find out the reasons for these changes and determine if the changes make sense in light of your business development. Address any that don’t!
• Benchmark ratios and margins against other successful businesses in your industry. Draw on your accountant’s experience, your peer network, and data from chambers of commerce, market research firms, or professional associations (such as retail and manufacturing associations, depending on the business and industry your are in). See if you are under-performing relative to these benchmarks. If so, do you know why, and what can you do about it. If you are doing better, can you leverage this advantage?
• Prioritize your costs/expenditures. Divide everything into two lists – Must Haves versus Like to Haves that are not necessary. Get rid of any items that are not necessary to the operation of your business and ensure you have the right controls in place to keep them out. A lot of hidden costs can creep up in this category – such as interest on outstanding credit card payments, banking fees, travel and entertainment. Many of these items may be slumbering under “Miscellaneous,” so monitor this line item to keep it in check. You can look at optimizing some processes around these (such as banking fees) and balancing them against cash flow requirements. Employee expense claims in particular can be an area where poor oversight can quickly lead to weaker margins.
• Set targets and make budgets using a planning tool with monthly, quarterly, or annual P&L statements. Identify whatever strategies you need to meet the targets and implement them. This includes optimizing processes such as approving and paying invoices. Are invoices circulating for days before they can be approved and paid? Are you making the most out of early payment discounts? Consider a purchasing order process. Many accounting software packages already include modules for this, otherwise it can be done with Excel. There are two benefits:

i) Purchases are approved upfront, prior to the invoices arriving, making invoice processing much faster.

ii) It gives you that much more transparency on upcoming expenses and payments, and therefore more flexibility to be pro-active in managing your costs (and cash-flow).

• Consider using credit cards as a method of payment wherever possible and collecting points that can be used to cover travel costs. But always be sure to pay off credit card bills when due. Cover any cash-flow deficits with a line of credit, not via expensive credit card interest rates.
• Move payroll as much as possible to a monthly cycle and electronic payments. 
• Challenge suppliers for better terms and switch fixed costs to variable ones. Take a good look at any flat rate fees you pay, especially for services, and the volume and frequency of use of these services. Are you using all that you are paying for, or would you be better off arranging a more discretionary use and payment? Track your performance and analyze variances to ensure you understand them and they are justified.
• Lastly, involve your employees. The expense claims cited above is only one example of the myriad ways that employees can impact your cash flow and the costs that eat into profitability. Ensure they have a clear understanding of the influence they have, both positive and negative, on the overall financial health of the organization.

If your business is in need of a short-term cash boost, the organizations that you can turn to will be far more receptive if you can point to clear and decisive measures you have taken to cut spending, increase sales and improve cash flow to more efficiently operate your business. It’s always easier to get help if you have demonstrated that you have first tried to help yourself.

Measures to improve cash flow include:

• Educating yourself. If you’re not familiar with bank statements or accounting statements, work with your advisor to be sure you understand cash flow, what it means to you and understand the issues. I’ve seen people who think their business is broke, and yet, they have a $150,000 in receivables on the books. One business owner was paying his creditors in two days, but giving his customers 30 days.
• Collect on your receivables. Don’t let customers use their debt to you as a form of credit. Consider offering them a quick payment discount as an incentive to pay early.
• Delay paying payables. By the same token, don’t put a creditor’s nose out of joint by using them as a form of credit. But don’t pay the bill any sooner than you are obligated to do so, unless there is some kind of obvious advantage, such as the incentive of a quick payment discount.
• Be co-operative and communicative. Everyone’s facing the same challenges. Be open and transparent with customers and suppliers and work together to establish a schedule for payables and receivables that everyone can live with.
• Manage your inventory. If you are in cash-and-carry business, such as retail, allow your inventory to drain a bit. Retailers typically carry at least 20 per cent more inventory than they should at the best of times. Cutting back on inventory can provide a big boost to cash flow. If times are tough, suppliers are more than likely dealing with their own inventory bloat and have the stock on hand to quickly resupply your business if the need arises.
• The loonie factor. On the other hand, if you import product, pay close attention to currency changes – be quick to take advantage of what is effectively a discount on foreign goods when the value of the Canadian dollar rises and stock up.

Sources of financing to consider

If, after putting your cash flow under scrutiny you still see the need for external financing, here are some options to consider:

Business Development Bank of Canada
BDC is a federally mandated institution dedicated to providing small- and medium-sized businesses with the financing options and consulting services they need to succeed. It offers venture capital to start-up and early-stage companies, subordinate financing for companies that are in transition, expanding or planning an acquisition, and term loans for businesses at various stages of development.

BDC does not offer grants, interest-free loans, lines of credit, or other services typical of a full-service chartered bank, such as bank accounts, term deposits or GICs.

To learn more, visit www.bdc.ca.

Ottawa Community Loan Fund
The OCLF provides short-term loans of up to $15,000 to small business owners, aspiring entrepreneurs, talented individuals with international training and community groups. It is a private organization that works with other community-based financial organizations to qualify borrowers, who must be able to demonstrate a worthwhile business concept, practical work experience and/or training, and a solid business plan.

To learn more, visit www.oclf.org.

Small business loans
Full-service chartered banks offer a diverse range of business services, including small business loans. These fixed- and variable-rate term loans are typically secured and reserved only for the purchase of long-term assets that support your business growth, to refinance an existing debt, or to fund a business expansion or acquisition. If your need is to cover a short-term gap in your cash flow, you need to discuss with your banker other options, such as a credit line.

To explore your options for a small business loan, arrange to sit down and have chat with your banker. RBC, for example, offers these options and terms for a small business loan.

Export Development Canada
EDC is a federal agency that provides financing, insurance and bonding solutions to Canadian companies that export goods and services, or that invest in other countries. On the financing side, it provides a number of services to support international transactions, such as paying for the up-front costs associated with the production of a large export order, to expand into new markets or to respond to a buyer’s request for financing.

Learn more about the various financing options EDC provides for exporters.

Friends and family
Never overlook the resources that are closest to home. Friends and family can come through for you in a pinch when institutional lenders will not. The challenge is to make sure to formalize any arrangement on paper to prevent family feuds or bitter estrangements. For example, in return for a cash investment, a family member can be given a convertible share. And pay interest on any loans with a formal repayment schedule.

Customer financing
This isn’t always a viable option, but you never know until you ask. Depending on the circumstances, a customer may be willing to make an upfront payment or a series of milestone payments. This is much more likely if you are recognized as a stable and trustworthy organization and you have a longstanding relationship with the customer.

With one of my ventures, we had a customer in the telecommunications industry who wanted to spend $350,000 on a product we hadn’t even developed yet. To secure this product, the customer was willing to pay 95 per cent of the value of the order up front to finance development. The customer was also in a bind where it needed to spend its budget before the end of its fiscal year, which played to our advantage.

And lastly, a note on personal exposure

It’s worth mentioning measures such as drawing on retirement savings to help float the business or using one’s home as collateral to guarantee a bank loan. But this kind of personal exposure can be risky and should only be considered as an option of last resort. Look before you leap and make certain you fully understand all the implications.

If you do put personal money into your business, ensure you cover it with repayment plans and loan agreements to get it out tax free. I have often seen people put money into their business, then declare it as income and pay income tax when they pay themselves back. This IS NOT taxable income. This is the repayment of a loan you have extended to that separate entity known as Your Business, Inc.

The issue

Business people know that their business cannot effectively operate without proper cash flow. The issue is to gain an understanding of the details of your businesses cash flow needs, anticipate problems and have solutions. In general if your cash flow has deteriorated and the bank is calling you to repay a demand loan or you cannot make payroll for your employees, you have reached a point in your business with limited options. If you plan properly, you can hopefully avoid this problem.

First: Gain understanding of your business cash flows

Gain an understanding of what cash inflows are generated by, and what cash outflows are required by,  your business on a monthly basis. Review prior monthly financial information (financial statements, bank statements) for historical data and trends and really understand your business’s ability to generate cash and consume cash.

• If you are a retailer, when do you pay for your inventory and how soon does that inventory result in cash inflow to the business?
• If you are a business which sells on payment terms, know what the average collection period is for a sale. Sales are not cash flow if you cannot collect the cash.
• How much do you purchase from suppliers, when do you make the purchases and what are the payment terms to your suppliers?
• Does your business have periodic payments such as insurance which could be paid over 12 months instead of a single payment?
• Know when your GST and income tax liabilities are due. Do not ignore the required remittances and instalments as the government will not let you borrow from them and there are consequences for personal liability, as well as interest and penalties costs, if your business stops making required payments.
• If your business has a cycle of slow sales periods each year, review how much cash you need to have to get to the next busy sales period. This means knowing what the cash consumption of your business is each month for rent/ mortgage payment, salaries, communication costs, vehicle payments and operating costs, and similar costs.
• Integrate your vacation into the cash flow. If you’re absent on vacation, the business may not be selling (if you are a consultant) or you are paying for someone to replace you while you are away.
• Integrate your personal cash needs from the business. Understand when you will need to take cash from the business for personal needs. Be realistic. If you cannot take cash from your business to live, the personal stress may affect your ability to operate the business.

Second: Use your understanding of your business cash flows to create a planning tool

Use the above information to create a detailed cash flow statement for a six- to 12-month period. The Entrepreneurship Centre can assist you in details of how to prepare this document. The cash flow statement is meant to give you information so you can anticipate cash flow challenges in your business. 

Why take time to create this cash flow statement?

• You need to understand your business before you can ask others to help. If you need an increased line of credit, it is better to anticipate that need than to ask for an increase at the last minute to allow the business to meet a payroll obligation. Lack of information indicates that the business is controlling you.
• It is difficult to make purchase decisions and hire staff if you cannot anticipate business cash flows.

You have to make estimates of future cash inflows from sales. While actual results will vary, you now have a cash flow statement tool to allow you to plan, adjust and react.

Third: Cash flow problems will happen – how to react

Virtually all businesses will have cash flow problems at some time in the life of the business. Slow sales consume cash and so can rapid growth. There is no ready solution for all problems, but review your alternatives. Communication with your employees, suppliers and the bank will be critical to get them on board and trust that you have identified the problem and are working on a realistic solution:

• Determine if the problem is a temporary (large cash outflow for unexpected repairs) or longer term (loss of a major customer, new competition driving down prices). If temporary, consider approaching suppliers or your landlord to defer payment for a month. If you have a mortgage, ask the bank to rearrange principal payments for a certain period. Consider temporary layoffs or job sharing to reduce labour costs. Review your business assets and sell redundant assets to create cash flow. Consider selling inventory at reduced prices to create cash flow.
• If longer term problems exist, review your ability to borrow against your home equity or refinancing existing debt. Consider selling required assets and leasing them back from the purchaser to create cash flow. If the business is at a growth stage where you cannot finance the growth and the bank will not provide further borrowings, consider a business partner who would inject cash into the business.