At different times we have polled visitors to our website on what their areas of focus are for their business. There have been varied responses, but the most common one is improving their bottom line. This article will focus on 5 different ways to help improve your bottom line.
Increase Working Capital and Improve Cash Flow To increase your working capital in your business and improve your cash flow, you need to have a good handle on your financials. Cash is "King", so it is important to be able to manage correctly the financials outlined below with relationship to your business.
What is in your bank account is not what is available to spend and if this is something you do, it can have serious repercussions if you do not know what receivables are outstanding and what payables are due. If you have to pick and choose who to pay each month, this means you are not generating enough cash to cover your expenses. In this case, your only option is to reduce expenses and / or increase revenue. Here are some tips in order to improve your cash flow that will in time increase your working capital:
Collect as early as possible. Unfortunately, in some industries, this is not possible, such as construction. This is an industry where they do not get paid until the supplier is paid.
For services business, make sure you take a retainer up front, use progress billings or provide final payment upon conclusion of the service.
Do not purchase more inventory than you need. It may increase your assets, but reduces your cash flow with an outlay of cash.
Take advantage of discounts for paying early if you have the cash on hand, otherwise, pay when due.
Productivity Increase Productivity is defined as the good output measures with respect to inputs supplied. In the case of employees Productivity rate = hours billable/hours paid. If you find you are paying your employees for more hours than you can charge out for in labour - this is a problem. A business that is functioning at over 75% is good, if you are under 50%, this is a problem area. This is especially true in services and labour intensive industries such as manufacturing. Here are some areas to look at in your business:
Another measure you want to look at is in determining the Revenue per Employee which is: Revenue / Number of Employees
Asset Turnover Ratio can often be used as an indicator of the efficiency with which a company is deploying its assets in generating revenue. Asset Turnover = Revenues / Total Assets
When considering overtime, you want to determine if you are having to pay overtime to reduce costs of sending employees out multiple days incurring expenses to finish a job or whether you are paying overtime due to low productivity, which lowers your productivity rate.
Code Your Transactions Properly Most business owners do not consider how their transactions are coded in their financial system, such as QuickBooks. This is where paying for an experienced bookkeeper and involving your accountant in your business can save you money in the long run. Here are some tips to keep in mind to keep more money in your pocket instead of CRA.
Do not expense assets, as this will cause an issue with CRA as there is a Capital Cost Allowance for large purchases. Capital assets are Balance Sheet items, and expenses are Income Statement items. If you are expensing assets, you are overstating your expenses and understating your assets.
Do not expense purchases that you are stocking, use the Inventory Account on your Balance Sheet. If you are expensing stocked purchases, you are underestimating your assets and overestimating your expenses.
If you are selling packages for services that are being used over a period of time, you should not should not recognize the revenue until such time you have performed the services. You would allocate the amount for the service performed in the month in revenue. If you recognize all of the revenue at one time, you will most likely end up paying taxes for monies where there is still a liability for the services still to be performed.
Pay attention to related party transactions - especially those involving the owner taking cash advances which is not part of their salary or dividends, as this becomes a shareholder loan and there are tax implications if this is not paid in full within an allotted period of time.
Pay Your Taxes When They Are Due There are three levels of taxation for a business which include Income Tax or Corporate Tax depending on the business type, HST for Provinces that have harmonized Tax, and Payroll Taxes. In some Provinces, there will be PST and GST instead of Harmonized Tax. Most businesses and business owners that in trouble with CRA, for the most part, is usually due to non-payment of HST (or PST/GST equivalent) or Payroll Taxes, as these taxes are paid on a monthly basis. For these taxes, you are acting as an agent of the government, and the cash you collect belongs to CRA. Here are some points to keep in mind moving forward:
If you are caught by the CRA not paying your HST or Payroll Taxes, you will not only be assessed for the amount you owe, but there will be a penalty, interest, or depending on the amount owed, you could incur such consequences as having your bank accounts frozen.
File your personal and corporate tax return on time, even if you cannot pay it, as it is not filing that could land you fined or in jail.
If you are having issues with payments, do not wait for CRA to contact you. Contact them and work out a payment plan with them. If you wait for them to contact you, you will not get the same level of help from them.
If you owe the government money, you will not be able to secure a loan from a Bank, a Credit Union. The only option available is usually factoring that has a rate that 25%+ interest in most cases.
Budget Many times we here from business owners that they believe a budget is constraining and will not allow them to spend. We are of the opinion, instead, that it will set you free. If you do not have a budget, how can you figure out what is going on in your business if you have nothing to compare it to, as we do not find many business owners that look at their profit and loss in detail on a monthly basis. If you have a budget, and things are going well in your business, it will help you maximize your opportunities. If you do not earn the profit expected, it will allow you to zero in on the specific line item that is out of line rather than reviewing transactions in detail. A budget will help you manage your business appropriately instead of worrying about whether you have the money to spend on items such as marketing to generate more sales.
Summary We hope this article helps provide you some guidance in looking forward and provides points you can use in your business to help you improve the bottom line in your business.