This website uses cookies to establish a secure connection and personalize your experience. By continuing you consent to the use of cookies. For more information and instructions on how to opt out of cookies, visit the Online Privacy and Interest-Based Advertising Statement. If you choose to opt out this message will continue to appear.

Online Policy Statement
a woman is sitting on a desk with a tablet in hands

Running your business

A guide for better management of your day-to-day business banking and finances to keep your operation running smoothly

Your daily tasks and responsibilities as a business owner can vary from finding vendors and customers to hiring employees. One of the areas that should always be on your radar is the financial side of running your business: how much your company is spending, earning, and how you can grow it.

In this guide, you’ll find answers to questions about business finances that come up every day, month, and year. 

a woman doing calculations at her desk

Focus on what matters: key financial metrics and calculations

How do you know that your business is doing well? If your customers and partners are happy and your sales keep increasing, there is nothing to worry about, right? 
 
If you want to see consistent results and grow your business, you need to look deeper and get actionable insights from the data, combining your gut feelings with solid numbers. 
 
Of course, no one wants to see sales decrease, but simply striving to increase sales may conceal tell-tale signs of future issues. For example, if you need to keep investing more money in raw materials and production to push sales, your expenses might spin out of control.

Monitoring financial ratios and their changes over time helps identify potential issues and opportunities. Keep your finger on these metrics to avoid unpleasant surprises:
How to calculate: Current assets (what you own) divided by current liabilities (what you owe)   
 
Question it answers: “How well can my business pay its short-term liabilities?” 
 
Why it matters: A low current ratio indicates that the business is more likely to have issues meeting its short-term debt obligations. It is considered to be strong when it equals 1.25 or higher. Banks look at current ratio to assess the creditworthiness of your business and its ability to repay debt.
 
How to calculate: Total debt divided by shareholder equity
 
Question it answers: “Does my business have too much debt?”
 
Why it matters: This is a measure of the level of debt the company has compared to how much equity is in the business. Typically, banks are looking for this ratio to be 2.50x or lower. A ratio of 2.50x means for every $1 of equity you have, you have $2.50 of debt.
 
How to calculate: Earnings before interest, taxes, depreciation, and amortization (EBITDA) divided by the total principal and interest payments made during the trailing or upcoming 12 months   
 
Question it answers: “Does my business generate enough cashflow to repay its loan and interest payments on all its debt?”
 
Why it matters: A ratio of 1.25x or higher is generally considered good. A ratio of 1:1 means your business makes just enough money to cover it’s debt payments. A ratio of 1.25:1 demonstrates that in the even interest rates rise or you have more expenses than anticipated, you have a 25% buffer.  Your bank typically does this calculation annually, but you can also calculate it monthly.  

How to calculate: (Current year’s sales number minus last year's sales number from that period) divided by (last year's total sales) x 100  

Question it answers: “Is my business growing steadily?”

Why it matters: Year-over-year revenue growth is a key factor in your financial ability to deal with risk. This calculation allows you to compare revenue from various periods – such as annual, quarterly, and monthly performance – and gauge how quickly you’re growing, as well as how seasonality may be affecting you.

By tracking these metrics and making decisions based on solid numbers, you can maintain financial health and put your business in position for growth. Regularly consult with financial experts to ensure your business stays on track.

Keep in mind that financial institutions often put covenants in place. Remember to carefully read the paperwork (for example, your commitment letter or contract agreement) to understand whether you, the borrower, must adhere to having a specific ratio value when the year-end review happens.

Make your financial statements make sense

a man using calculator
As a business owner, you don’t need a crystal ball to see future risks and opportunities. What you need is to regularly analyze your balance sheet, income statement, and cash flow statement, using key ratios and spotting trends. The focus should always be on ensuring sufficient cash flow to meet all obligations.

If there is one thing you need to monitor closely month after month, it is your business’ income statement. At the end of the day, the business needs to generate sufficient cash flow to meet all its daily expenses. That includes everything from employee wages, to paying suppliers and business loans.

Two key things your income statement will tell you are gross profit and cash flow or EBITDA. You can take it a step further and calculate gross margin: total revenue minus cost of goods sold (COGS). It indicates the profitability of sales after accounting for the cost of goods sold.  Cash flow or EBITDA (earnings before accounting for interest, taxes, depreciation, and amortization) shows how much cash is generated from operations and is available for expenses.

On the balance sheet, look for your company's liquidity, equity, and the overall leverage on the company. Company liquidity is its ability to repay debts, such as payables and loan payments. It’s measured by looking at the current ratio. The lower the liquidity, the more risk there is that the business could face a cash crunch in the near term. Overall leverage on the company is measured by the total debt divided by shareholder equity. The higher the leverage, the more risk there is that the company could be unable to make its loan payments

A cash flow statement will tell you where the business is generating its cash from – and where it’s spending it. This statement typically has three sections: Cash Flow from Operating Activities, Investing Activities and Financing Activities.

Growth Decoder, a podcast from CWB, on a teal background and underscored by a marigold arrow moving upward.

Ready to grow your business?

Growth Decoder digs into the pivotal moments that entrepreneurs face and asks how they tackled each challenge to get where they are today. Enjoy the tangible takeaways that you can use as you build your own business. 

Master cash flow management: tips and strategies 

Liquidity is fundamental for business survival and growth. But if cash is king, then managing cash flow is the royal route to business success. This path often involves navigating unexpected challenges and requires strategic planning and preparation.

It's not uncommon for a business to have cash flow problems. Many businesses that fail are actually profitable, they just didn't have sufficient cash flow.

There's a clear link between good cash flow management and being in a strong position to take thoughtful, strategic actions that will advance the health of your business. Having cash on hand allows you the benefit of time – you can wait for the best opportunities, and don’t have to be reactive all the time.


Growing pains: How to scale without sacrificing quality

The balancing act: manage payables and receivables effectively

two people going over paperwork

As a business owner, you should stay attuned to the gap between collecting and paying – how quickly are you receiving funds, and how quickly can you pay vendors? In some cases, you might not want to pay early if you’re not making cash fast enough to fulfill immediate needs.

One of the signs of a healthy business is whether it’s generating enough cash to cover off all its debts in a given year. Not only that, a business’ ability to spend money impacts its ability to get money from a bank in the form of credit, such as through a margined operating line. So, the way you collect money as receivables, spend it as payables, and manage the two is critical.

The impact of receivables on cash flow and credit

Cash management approaches often differ by the type of business you run. Unlike industries such as retail or professional services where payment is immediate, sectors like construction and manufacturing are regularly paid well after a service or good is delivered. This creates a need to monitor receivables more closely.

Factors affecting the collection of receivables can be broken down into two major categories:

  • Payment terms issued to clients and adherence to these terms
  • Client relationships and the enforcement of terms

Remember to keep a close eye on your receivable turnover ratio. A higher ratio indicates efficient collection processes, while a lower ratio invites you to look for inefficiencies and possible improvements.

Small business owners should focus on customer relationships and managing cash flow carefully, while mid-sized businesses might employ accounting staff to assist with payables and receivables.

Managing cash flow

Why timely information is key.

Expert insights on collections

Five things to remember to make your collections process smoother and more efficient: 

  1. Think about collecting as lending and treat accounts receivable as a lending tool. Conduct due diligence on customers to ensure you’re paid on time.
  2. Know your customers: You need to know your customers to be able to sell them your products and services. But it is also crucial to perform credit checks and reference verifications before selling on credit.
  3. Close sales details: Define payment terms clearly before starting work.
  4. Analyze payment options: Evaluate the costs and benefits of various payment methods with your financial partner.
  5. Implement effective collection strategies: Use solutions like merchant card services or EFT platforms to manage receivables.

Choose essential financial tools for your business

a woman in orange turtleneck is holding a tablet and smiling looking outside the window
Understanding the connection between personal credit and business loans
When applying for a business loan, banks often review your personal credit score because it reflects your financial habits and reliability. This is especially relevant if the loan requires a personal guarantee. Personal credit history helps lenders assess the risk associated with the loan and your ability to manage repayments.  

Key points to understand:

  • Personal credit impact: Personal credit scores are reviewed alongside business credit scores to evaluate loan applications. A good personal credit score can improve your chances of getting a loan.
  • Ongoing review: Banks regularly check your credit score to monitor your financial health. Any significant issues like missed payments or legal disputes can affect your loan terms or approval.
  • Improving both scores: Good financial habits apply to both personal and business credit. Maintaining a healthy credit score in both areas supports better borrowing terms and financial management.

Many small business owners use their personal bank accounts for business transactions for perceived savings on costs. This might seem like a good way to avoid fees, but it can complicate your banking as your business grows. Setting up a dedicated business account is essential for managing increased transaction volumes and simplifying financial management.

How to know it’s time for a business bank account

If your business involves regular transactions and payments, it's time to consider a separate business account. This is especially important if your business is your primary source of income. Planning for future growth and having separate accounts helps in managing finances more effectively and preparing for scenarios like leasing arrangements or applying for loans.

How to choose the right business bank account

  1. Define your needs: Start with a basic account that meets your current requirements. As your business grows, you can upgrade to accounts with more features like higher transaction limits or additional services.
  2. Consider the quality of your banking experience: Choose a bank that offers convenient service options and supports your business needs. Look for personalized service and support, which can be crucial for addressing issues and accessing banking services.

Why you should have personal and business accounts at the same bank

  • Ease of banking: Managing both accounts at the same bank simplifies transactions and transfers. Many banks offer features that make it easy to toggle between personal and business accounts.
  • Relationship pricing: Having all your accounts with one bank can lead to lower fees and better service due to the volume of business you do with them.
  • Stronger partnership: A bank that handles both personal and business accounts can provide more comprehensive support and a stronger relationship, which can be beneficial in challenging situations.

Business credit cards: Advantages and considerations

Business credit cards offer benefits tailored for business needs, such as higher credit limits, rewards programs, and expense tracking tools. They are useful for managing cash flow and separating business expenses from personal ones.
Advantages of a business credit card:

  1. Convenience and flexibility: Business credit cards allow quick payments and come with rewards programs that can save money on business expenses.
  2. Expense tracking: Tools for tracking and reporting expenses help streamline accounting and tax preparation
  3. Security: Credit cards offer protection features like fraud detection and digital capabilities that enhance security.

Choosing the right card:
  • Assess needs: Look for cards that offer rewards and features suited to your business's spending patterns and financial goals.
  • Compare options: Evaluate different cards based on fees, rewards, and additional benefits to find the best fit for your business.

By understanding the benefits of business accounts and credit cards, you can better manage your finances and support your business's growth. For more information and to explore business banking solutions, consider reaching out to a trusted financial partner, like your bank.

Get in the driver's seat: how to prepare for a financial wellness conversation

Financial wellness involves meeting your current and future financial needs, feeling secure about your future, and having the freedom to make life-enhancing choices. Discussing this with your bank can help you assess and improve your financial health.

Portfolio reviews for business owners

a banker is talking to a customer about banking products

For businesses, portfolio reviews involve assessing financial performance and discussing key metrics and terms. They provide valuable insights and help align your business goals with financial strategies. A portfolio review is when you go over your business banking file with your relationship manager. Typically, it involves a financial review, a report on your key business metrics and the ratios mentioned above, and assessing how well you’re meeting the terms or covenants you’ve agreed to.

Benefits and preparation

Portfolio reviews offer a fresh perspective on your business. Prepare by organizing your financial documents and discussing your business’s performance and future plans. 

Effective financial wellness discussions and portfolio reviews require preparation and openness. Clear communication with your bank ensures better outcomes and helps achieve your financial goals.

You should feel comfortable asking anything that comes to mind, but most importantly, asking your banker for their perspective on the business.

Navigate tax season like a pro: getting ready for the most taxing time of the year

Tax time can be stressful, but it doesn’t have to be. One of the top tips to reduce stress is to start preparing for tax season early. Organize financial documents, discuss strategies with your accountant, and review financial goals with your banker. Getting a head-start on rounding up any bank statements will make it quicker to navigate the tax season from a banking perspective.

Starting early helps streamline the tax filing process and ensures you’re well-prepared. Here are 7 more tips to help you navigate tax season year after year.

1. Prepare relevant borrowing documents
Loan agreements: This lays out what each loan is for – whether that’s real estate, equipment, or other – and also the amortization schedule. The amortization schedule breaks down your monthly payment and what’s being applied to your principal vs. what’s being applied to the interest. This gives you an idea of the loan’s interest expense for the year.

Principal and interest statement: You can request this simplified document from your lender. This is one of the most frequently requested statements from clients, especially during tax time. Ask your lender for the statement a month or two in advance of your fiscal year end. This allows your accountant some breathing room ahead of preparing your financial statements.

2. Organize receipts

Collect and organize all business-related receipts to simplify tax filing. This includes expenses for equipment, mortgages, and operational costs. Staying organized helps avoid last-minute scrambles during tax season.

3. Prepare to claim interest expenses

Borrowing costs come with a tax advantage: interest on loans used for income-generating purposes is tax-deductible. For example, a $1,000,000 loan with a variable (or prime-tied) rate saw a $17,500 increase in interest over a year due to increasing rates. This higher expense can be partially offset by a lower taxable income.

To claim interest deductions:
- Ensure the loan is used for generating income.
- Maintain key documents: borrowing documents, loan agreements, as well as a principal and interest statement from your lender.

Remember to consult with your accountant as well as the Canada Revenue Agency’s Income Tax Folio S3-F6-C1, Interest Deductibility.

4. Manage cash flow

Properly managing cash flow is crucial. Claiming interest expenses can reduce your taxable income and help preserve cash flow. Work with your accountant to ensure all eligible deductions are claimed.

5. Know when to purchase capital assets

Timing of capital asset purchases affects tax deductions. Buying assets before year-end allows you to claim more depreciation in the current year. Delaying purchases to the next year defers deductions, impacting your tax strategy.

6. Work as a team

Good communication between your accountant and banker is essential. They should understand each other’s roles and expectations to avoid issues with financial covenants and tax strategies, like these ones:
- Shareholder loans: Repay loans within one year to avoid inclusion in personal income.
- Income splitting: Be aware of the rules that limit income-splitting options.
- Investment income: Monitor investment income to maximize the Small Business Deduction.

7. Track your business-use-of-home expenses

If you’re using part of your home for business-related activities, you’ll want to be in the know about how much you can claim on your taxes. Keep a good record of all those costs. Utilities, cleaning materials, insurance, property taxes, mortgage interest – it can all be deducted.

Contact our dedicated business experts now

Get expert advice and financial solutions tailored to growing your business

By submitting this form, you confirm your understanding and agreement with CWB's Privacy Policy and Legal Disclaimer