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Cash flow & cash cycle 6 min read

Tapping into cash flow Part I: Cash flow & cash cycle

Cash is king. It’s an old adage that’s stood the test of time – maybe because it holds true for every business owner.

But if cash is king, then cash flow is the royal route to the castle. And it’s a path often fraught with unexpected twists, turns, obstacles, and more than a few heroic battles.


Yet when it comes to having enough cash on hand, success is in the planning and the preparation – like having a deep understanding of your business and what affects it, anticipating the things that are certain, possible, and unknown, and being aware of your options (because, believe it or not, you do have them).


And ok, let’s throw in one more “p”– partnership. As in working with a banking partner like Canadian Western Bank (CWB) to help you navigate through the ups and downs.


“Every morning I get a client cash management report and I’m constantly looking at it throughout the day, anticipating opportunities or obstacles – and I’m then getting on the phone with our clients to talk solutions,” says Judy Herauf, Manager, Cash Management at the Edmonton Gateway Banking Centre. “And this isn’t just me working by myself on an island. There’s a whole team of us from different service pillars – like commercial lending or one of our specialized groups – engaging on this too, talking to each other, bringing different perspectives to the table.”


In this two-part series, members of our CWB teams from across the organization offer their two cents on how to keep the dollars flowing.  


Part I: Cash flow & cash cycle


Cash flow: How much cash do you actually need…and when do you need it?
It’s important to have a good handle on what your cash flow needs look like 30, 60, and 90 days from now, examining what the peaks and valleys are, and when your major expenses will hit, says Herauf, explaining she looks at three to four months of client statements to get a good understanding of these ebbs and flows.


“You need to plan for how you’re managing those funds in between. Having that birds-eye view helps you know when you need to move money right away and when it can perhaps be placed in savings to earn some interest – and for how long,” she says. “Maybe you’re a charity and you do a membership drive once a year or have a few key fundraising events and the majority of your revenue is coming in all at once. Or maybe your business is seasonal.”


Trevor Sproule and Georgina Knitel know all about seasonality. Having worked together for 11 years, these lead members of CWB’s Agriculture team say 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.  


“If you don’t have the cash flow, you don’t have the best ability to make decisions. For example, you end up having to sell now or buy now vs. waiting for a better price or opportunity,” says Sproule, Assistant Vice President and Head of CWB Agriculture Banking. 


CWB Agriculture Banking Assistant Vice President and Agrologist Knitel adds you may be in a scenario where your product is there but you’re unable to convert it into cash right now. This makes it crucial to have a fall-back plan.


“It's not uncommon for a business to have cash flow problems, and many businesses that fail are actually profitable, they just didn’t have the cash flow,” says Knitel. “Having cash on hand allows you the benefit of time – you can wait for the best opportunities, you’re not having to be reactive all the time.”


Both Sproule and Knitel reference the old saying “keep your powder dry” or, in other words, be ready for anything – including ensuring that if you don’t have cash within reach, you at least have a means to carve it out from capital if you need to (tip: your financial partner can assist you with this).  


Cash cycle: What’s coming in…what’s going out….and what’s left over 

“Money in, money out really is determined by how quickly a company can generate cash vs when they’re paying their expenses – and typically the cash conversion cycle lengthens if there are long delayed receivables to be collected or in some cases where inventory assets become obsolete,” says Dave Ylagan, Senior Relationship Manager, Commercial, noting that, in comparison to service-based businesses, those producing or providing a product have the extra consideration in the cash cycle of securing inventory and cost of materials.


He recommends being attuned to the gap between collecting and paying – how quickly are you receiving funds vs when are you paying vendors? – and suggests that in some cases maybe you don’t want to be paying early if you’re not making cash fast enough to fulfill immediate needs.


To this end, he says it’s helpful to look at the trade terms you have with your customers or vendors, including getting candid about whether those terms are currently being followed, or if there’s room to negotiate them so they better align with your cash flow needs.


“These can be tough conversations, but it pays to talk it through with your customers and vendors if there’s any leeway on the timing of when payments are coming in or going out,” he says. “If you’re a retailer, cash flow is really important to inventory management. You have to be able to bring in more inventory when you need it, but you also need to be ok if it’s taking a little longer for that inventory to move.” 


In the restaurant industry, even though payment is received immediately and cash flow has less variability throughout the year than, say, an equipment or manufacturing business, profit margins of just 10-12 per cent make managing expenses paramount, says Jacob Mancini, Assistant Vice President CWB Restaurant Franchise.


“The most important metric for restaurants is cash flow. It’s also the metric by which a bank uses to lend you money. The value is based on cash flow, not asset consideration,” says Mancini. “The first thing I’m going to look at is what are your cost of goods sold and labour margins, and what has your relative stability been looking like within that space. Is it pretty even, or is it out of balance?”


Mancini adds that he’ll then look at what the restaurant owner is doing to preserve and create revenue – this could include down-sizing your menu, getting by with less labour if you can, aligning your menu pricing to more accurately reflect your expenses, or pivoting to a takeout or delivery program.


 “Even more so in this pandemic environment, you need to be doing the right things now with respect to the market evolving and keep pivoting for that. The industry will be different when we eventually come out of this, so you need to be adapting along the way,” he says.


So, what are some of the considerations businesses should have when it comes to protecting – and ideally growing – their cash flow in the face of an ever-changing landscape? In Part II we look at how to navigate the winds (both forecasted and unforeseen) so they don’t blow you off course.


Have more questions about cash flow? Reach out here.