Best Practices : Cashflow is King (5)

Businesses do not go out of business because they are making a loss – they go out of business because they no longer have the cash to meet their obligations.

The main point about this article is to highlight the various variables that affect the amount of cash you have on-hand.  This is not about mitigating your loss; most businesses will make losses in the first year or three.  That’s not an issue, you can easily run a business with losses if, for example, you have a line of credit or loans or sufficient capital to deal with the losses.  The goal however is to never run out of money such that you can’t pay your bills.

When thinking of cashflow, it’s worth thinking in terms of both your cash-on-hand (your start-up capital & any retained earnings and the like) and the total lines of credit available (e.g. your credit card limits, your LOC limits & your loans).  It’s also worth working out how many (average) months of expenses you have using both those figures.  If you have enough cash on hand to manage 2 to 3 months of expenses, you are quite set.  If you’re dipping into your lines of credit with only a month left; you are in a seriously dangerous zone.

The other area to consider when thinking about cash flow is fixed and variable expenses.  Certain expenses (e.g. rent) are pretty fixed while others (e.g. marketing costs) are highly variable.  It’s worth taking a look at your financial sheets regularly (at least annually) to understand which of those expenses are fixed or variable.  When you are down to a month left of  funds, you’ll seriously need to look at what you can cut.

There are also other factors that affect what your cashflow is like.  Here’s some areas that you might not even have considered:

  • Upfront costs

You are going to have quite a few.  Incorporation costs, interior design costs (shelving, desks, etc.) and office equipment all need to be purchased before you begin pulling in revenue.  In this case, it’s rare that you can do much to reduce the outflow of cash but you need to plan to have sufficient capital to deal with these upfront costs.  In our case, we had 4 months of no revenue while the site was being set-up but we continued to incur expenses during that period.

  • Inventory, Suppliers & terms

Depending on your suppliers, you either pay immediately or receive terms (e.g. 5, 15 or 30 days after the invoice).  If at all possible, you will want to receive terms.  (Side note: to reduce cost, it’s cheaper and better to pay by checks since most companies charge a credit card use rider which can range from 1 – 2%).

Terms give you more time to receive and sell your stock without ‘paying’ for it – which can be useful if you are stocking up for high sales periods (e.g. Christmas).  Quite often, when a new game releases a surge in sales will occur and then sales will peter out.  As such, while you might order 6 copies in the beginning, you might only want to have 1 copy in-stock for the rest of the yea.  Terms allow you to order those 6 copies, keep the revenue for the sale of the copies and re-order your 1 ‘permanent’ copy; without touching your working capital.

  • Gateway Processing Times

This affects us an online business the most; but it is something to watch while you’re running a b&m store.  Most businesses take credit cards, which are processed through a merchant gateway.  These merchant gateways can take between 1 – 2 business days to process your funds and send it to you.

PayPal is notoriously bad for this – they don’t send you your funds until you request it; and also charge a fee for amounts less than $150.  In addition, it can take up to 5 days after your request for the funds to be deposited.  So even if you’ve sold a game, you might not receive the money till a week later.

  • Payment methods

Anything paid via cash or Interact is immediately debited.  Payments by check can take up to a week (especially if you’re paying a US supplier) from the moment the check is cashed by the supplier to it clearing on your side.

Credit cards on the other hand can provide up to 44 days of free credit; depending on the closing date of the statement and the charge.  This is almost ‘free’ money; so long as you pay the credit card off completely.

  • Taxes

Again, this can be quite a boon for businesses as taxes are often remitted quarterly or annually.  Before the switch to the HST, PST was collected on a quarterly basis.  As such, we ‘collected’ the PST charges to customers regularly in our bank account and only had to pay it out 4 times a year.

With taxes, the biggest danger is not setting the appropriate amount aside.  Employee EI & Remuneration is  one of the few things that a director of a corporation is personally responsible for.

Well, outside of sales; but that’s a different article entirely.  The longer (legally) you can keep from paying a charge, the better your cash flow looks.  However, just because you’ve delayed a payment doesn’t mean you don’t have to pay it!