Small businesses in Ontario employ many people and contribute significantly to the overall economy. However, as any business owner will tell you, protecting business cash flow is one of the biggest keys to success.

After all, if you can’t pay your bills, the company’s overall financial picture will suffer. Fall too far behind, and you might find yourself looking for protection from your creditors.

The risks to being self-employed are often mitigated by the rewards, as long as you take steps to protect positive cash flow and not find yourself in a financial situation that becomes harder to recover from as time goes on.

Positive Cash Flow vs. Negative Cash Flow

You may have heard of both positive cash flow and negative cash flow. The difference between the two is fairly significant: positive cash flow means that the company’s liquid assets are increasing, and the company has the resources to reinvest in the business, pay its bills, and provide protection during leaner times.

Conversely, negative cash flow means that a company’s liquid assets are decreasing. There is no money left over to grow the business, bills become overdue, and even the smallest misstep can cause a financial crisis.

There are no shortcuts to protecting positive cash flow, but rather it takes careful, comprehensive planning to keep the money coming in during both good times and bad.

Protect Your Cash Flow

Many business owners believe that your cash flow solely depends on bringing in more cash than the business pays out. This is very true, but there are many other unforeseen circumstances that can affect your cash flow to the point where your company’s existence is threatened.

The good news is that you can protect your business against most unexpected expenses by understanding your legal and tax obligations when setting up your business, and taking proactive action to address them before opening day:

• Do you have employees? You are responsible for compensating them on a fixed salary or hourly wage basis, and for applying statutory deductions from their paycheques. You’ll also have to make regular payroll tax remittances to Canada Revenue Agency (CRA). Falling behind on these remittances can lead to trouble with CRA quickly, which will threaten your positive cash flow and your business as a whole.
• Do you use contractors? If you opt to hire contractors instead of employees, be sure to have them sign contracts that indemnify you from making any kind of deductions for them, and that they’re responsible for remitting their own income tax to CRA. If you don’t protect yourself and CRA unexpectedly determines that you are responsible to remit payroll tax on their behalf, your cash flow will suffer significantly.
• WSIB insurance: If you have employees, you may be required to get workplace health and safety insurance through the Workplace Safety and Insurance Board (WSIB). Many business owners think that only factories, construction sites, and other heavy industrial companies require WSIB insurance, but it may surprise you to learn that WSIB insurance is mandatory for accounting firms too. No matter what business you’re in, be sure to check if you’re required to carry WSIB as well in case the result of a workplace injury damages your cash flow.
• Remitting HST: If your business is incorporated, or earns more than $30,000 in revenue, you need to register with CRA for an HST number, collect HST from your customers, and remit the funds to CRA. If you are required to remit HST under the above conditions but neglect to collect it, CRA will still expect to be paid. This unexpected remittance can seriously damage your business cash flow, especially if interest and penalties for late payments are applied to the principal.
• Business insurance: If your business has physical location, you will need business insurance. If you have business equipment, it will need to be insured. Commercial vehicles need special insurance too. In the event of a workplace fire, flood, or break-in, equipment breakdown that slows down production, or commercial vehicle accident, your business insurance policies should cover most of the expenses. If you have insufficient coverage or the incorrect insurance, the damage to your cash flow could be catastrophic.

These are just a few of the many aspects of business ownership that need to be reviewed to protect your cash flow. In short, proper planning before you start will go a long way to maintaining financial health for your business over the long term.

Unfortunately, you can’t protect your business against every unforeseen circumstance. Some things are just simply out of your control. In these cases, you need a cash flow strategy to get you through lean times.

Help with business Cash Flow Management

You can take all the available precautions, but there can still be threats to your business that you have no control over. Unexpected market changes are hard to predict. New technology can make you suddenly obsolete. One of your biggest vendors may go out of business suddenly while owing you a significant amount of money. Any of these situations and more can leave you scrambling to make up for the losses and keep your business afloat, especially if you’re a small operation without a lot of capital. Fortunately, help is available to maintain positive cash flow.

Charles Advisory Services can work with you to determine your cash flow needs, work with suppliers to reorganize debt, or help you settle debt with CRA so you can keep your business operating while you reorganize your company, keep earning revenue, and maintain positive cash flow.

In cases where a Division 1 proposal is filed to settle debt, we provide your creditors with a detailed cash flow projection, which will demonstrate your willingness to pay and help improve the chances of the proposal being accepted.

Cash flow is always key to business success, and is especially important during a crisis as well. As always, you can talk to me anytime if you have any questions.

Robert Charles, B.A., CIRP, Licensed Insolvency Trustee, is the founder of Charles Advisory Services.

For every debt problem, there’s a debt solution. Since 2006, Licensed Insolvency Trustee Robert Charles and his team at Charles Advisory Services have helped individuals, families, and businesses in Toronto move beyond debt towards financial health. Contact us today for a free consultation.

TIP: While business is good, set up a secured line of credit with your financial institution. That way, you’ll have access to funds should you get into a negative cash flow situation. Work repayments into your budget, and be careful not to borrow beyond your capacity to repay or you could quickly make matters worse.