At different times, we have polled visitors to our website on their areas of focus for their business. There have been varied responses, but the most common is improving their bottom line. This article will focus on five different ways to help improve your bottom line.
Increase Working Capital and Improve Cash Flow
When wanting to increase your working capital and improve your cash flow, you need to have a good handle on your financials. Cash is "King," so it is essential to correctly manage the financials outlined below in 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 severe 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, you are not generating enough cash to cover your expenses. In this case, your only option is to reduce costs and/or increase revenue. Here are some tips to improve your cash flow that will, in time, increase your working capital:
Collect as early as possible. Unfortunately, this is not possible in some industries, such as construction. This is an industry where they do not get paid until the supplier is paid.
Ask for a retainer upfront. Especially for services business, make sure you take a retainer up front, use progress billings or require 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. Only do this if you have money on hand; otherwise, pay when they are due.
Increase Your Productivity
Productivity is defined as the ratio between the output volume and the volume of inputs. 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 functioning at over 75% is good. If your productivity is under 50%, this is a problem area for your business. This is especially true in services and labour-intensive industries such as manufacturing. Here are some areas and measures to investigate.
Another measure you want to look at is in determining the Revenue per Employee which is: Revenue / Number of Employees.
The 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 have to pay overtime to reduce the 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
Many business owners do not think about how their transactions are coded in their financial system. This is why 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 you are stocking. Put the purchases in Inventory Account on your Balance Sheet. If you are expensing stocked purchases, you underestimate your assets and overestimate your expenses.
If you are selling services that are being used over time, you should not recognize the revenue until you have performed the services. You allocate the revenue amount for the service performed in the month. If you realize 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 to be performed.
Pay attention to related party transactions. This is especially true of those involving the owner taking cash advances which is not part of their salary or dividend. This is a shareholder loan and there are tax implications if this is not paid in full within the allotted time.
Pay Your Taxes When They Are Due
There are three levels of taxation for a business which include:
Income Tax or Corporate Tax
HST for Provinces that have harmonized Tax
Payroll Taxes
In some Provinces, there will be PST and GST instead of Harmonized Tax.
Most businesses and business owners that are in trouble with CRAis usually due to non-payment of HST (or PST/GST equivalent) or Payroll Taxes. These are owed every month. 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:
Do not get 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 penalties, interest, or, depending on the amount owed, you could incur such consequences as having your bank accounts frozen.
File your personal and corporate tax returns on time. Even if you cannot pay the total amount, this is crucial, as it is not filing that could land you fined or in jail.
Do not wait for the 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 or a Credit Union. The only option available is usually factoring, which has a rate of 25%+ interest in most cases.
Budget
We often hear from business owners that they believe a budget is constraining and will not allow them to spend. We believe, 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 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 guide you in looking forward and provides you with tips that you can use in your business to help you improve the bottom line. If you need help in the area of financial management, we provide services that can help you better financially manage your business.