Do you know a business that’s reporting a profit yet is still struggling to make payroll, pay suppliers or cover interim tax payments? For a growing business, cashflow management is not simply watching the bank balance. It actually means understanding the accounts receivable and payables, in addition to costs of holding inventory, debt reduction and capital purchases. Depending on the pace of growth, these kinds of factors need to be assessed in real time and for the future.
Profit measures the revenue and expenses over a specific period. Cashflow tracks the money that’s available as it goes in and out of the bank. The timing of expenses compared to cash available can turn healthy sales into an immediate cash crunch.
Here are the 7 signs to be aware of when considering the cashflow for a business.
1. Revenue is rising, but the bank balance keeps falling
Growth often consumes cash before it produces cash. You may need to hire staff, buy materials, carry inventory, add software to fund a large capital project weeks (or months) before a customer pays.
Let’s consider this scenario: you bill customers $100,000 at the end of the month. However, with a 60-day term, the money doesn’t arrive until 2 months later. That means cash is not available to pay current invoices or employees.
The fix here is not to slow the growth of the business due to lack of funds, it’s to model the cashflow required to support operations at the same time as forecasting expenditures before pressure arrives. That takes discipline.
2. Accounts receivables are getting older
A growing receivables balance is not always a good sign. It may mean more sales, but it could also be that customers are taking a long time to pay. In which case, you have to consistently follow up with them.
To offset this, review receivables by age. Schedule when payables are due and determine the customers that have overdue amounts. Look for any customers disputing invoices, or if any purchase orders are missing, and whether the invoices have been followed up on.
Practical improvements include prompt invoicing, confirming payments terms before work begins and assigning follow up responsibility. This is especially important when tackling escalating overdue accounts. Create a plan to track receivables to ensure they are getting paid on time.
3. Taxes and payroll remittances feel like surprises
Corporate tax installments, GST/HST and other obligations can create extreme pressure when the cash is simply not available. The problem is rarely that the due date was unknown; more often, the funds that were considered as available operating cash.
To lessen this type of surprise, consider scheduling remittances into your forecast and use separate accounts or internal reserve categories when appropriate. A reserve doesn’t make the expense smaller, it is meant to prevent the deadline from colliding with payroll, fixed costs or supplier commitments.
The exact obligations and timing depend on your business, so confirm them with a qualified accountant and current CRA guidelines.
4. Relying on the line of credit for regular monthly expenses
A line of credit (LOC) can be a useful working tool for capital expenditures. It becomes a warning sign when the balance never meaningfully declines or when borrowing regularly funds ordinary expenses without a clear repayment cycle.
It’s best to separate temporary gaps from structural shortfalls. A short-term gap may be resolved when a known receivable arrives. A structural problem such as weak margins, excessive overhead or persistent owner withdrawals will return even after the next deposit.
Track how and why the LOC is used, how long the balance remains outstanding and if there are any expectations of when it will be paid down. The answers will give you a clearer picture of underlying issues that need to be resolved in order to pay it off.
5. Lack of knowing which customers, projects or services generate income
In the trades and construction industry (for example), a busy project might require overtime, rework, rush shipping, subcontractor costs or unbilled scope changes. A reoccurring customer might also want longer payment terms and special discounts. These situations can erode your margins.
Take the time to analyze projects to compare quoted margins with actual results. Pinpointing where time and resources are leaking can ensure a stop to the loss in revenue. Two projects with the same profit margin can have very different working capital demands.
When the data is available, management use it as evidence to adjust pricing, deposits, progress billing, purchases and even project selection before a problem presents itself.
6. Major purchases are decided without a cash plan
To support growth, businesses need to invest more in things like equipment, inventory, renovations and technology. Various factors such as financing options, deposits, training, and maintenance can affect cashflow.
Best way to determine how to manage the growth needs is to model different situations. In one situation, revenue is lower than expected, in another receivables are delayed 30 days. Taking into consideration notable scenarios that could impact revenue in and out of the business can lead to knowing what expenditures are manageable in a set time period.
7. Decisions are based on today’s bank balance
A bank balance is factual, but it’s incomplete. It doesn’t show next month’s payroll, an upcoming tax installment, etc. Thes are things that require attention today because cash might not be available until some time in the future.
A rolling cashflow forecast turns these types of commitments into a forward view. For many businesses, a detailed 3 month forecast is a practical starting point because it is close enough to manage actively and long enough to reveal pressure points.
The forecast should identify known inflows and outflows. It should also take into consideration any uncertainties or false assumptions. Through practice, accuracy in forecasting will improve.
How to Create a Practical Cashflow Plan
Cash control comes from discipline that involves more than a one-time spreadsheet. A useful plan can include:
- Updating a rolling 3 month cashflow forecast every week
- Reviewing receivables by how long they have been outstanding and expected payment date
- Listing committed payments, payroll, tax installments and debts
- Documenting any major capital expenditures and how to prepare for payment
- Tracking forecasted cash to actual results by customer, project or service
- Deciding what actions will be taken if there is cash shortage
BDC describes working capital as the money available to cover short-term obligations and operate the business. Managing it well can reduce financial stress and support growth, but the right level varies by industry, seasonality, payment terms and risk.
What to Do Now to Manage Cashflow
Here are the steps to get started.
- Document due dates of receivables, payables, payroll, debt and tax requirements
- List the realistic dates receivables will be in the bank (not the invoice date)
- Identify every known payment for the next 3 months
- Outline different scenarios to offset the lowest projected cash point
- Prepare immediate actions to take for accelerating an invoice, adjusting a purchase or seeking financing before it becomes urgent
If you see a recurring gap, look for the root cause. Is it pricing, margin, billing, collections, inventory, overhead, debt structure or other issues? Go to the root cause to address the problem.
Turn Profit Into Financial Momentum
Profitability matters, but cash determines whether the business can act. A clear forecast gives owners time to make better decisions. They can also approach lenders before a crisis or negotiate from a stronger position.
Crescendo Accounting helps businesses grow. We don’t just do year-end filing. From connecting your bookkeeping to reporting and financial strategy, we can make sure the numbers support your decisions. If your business looks profitable and but cashflow is unpredictable, our focused review can reveal where the pressure begins.
Book a consultation with Crescendo to build a cashflow system that suits your growing business.
How can a profitable business run out of cash?
Profit records revenue and expenses. Cashflow records the timing of receivables and payments. Slow collections, rapid business growth expenditures, debt payments, taxes can all consume cash even when profit is positive.
What is working capital?
Working capital is generally current assets minus current liabilities. It indicates the short-term resources available to operate and meeting obligations, but the appropriate amount depends on the business model and operating cycle.
How often should cashflow be reviewed?
A growing or cash constrained business should usually update a short-term forecast weekly and review broader trends monthly. Stable businesses may use a less frequent routine, while seasonal or project-based businesses often need more frequent attention.
Is a 3-month cashflow forecast always required?
No single timeframe is right for every type of business. However a 3-month planning window is a good start for any business. It balances immediate details with enough time to respond to upcoming commitments.
When should a growing business ask for an accountant’s help?
Seek help when cash shortages repeat, you have aging receivables, tax payments are behind, true profit margins are unclear or financing is at its limit. It’s time to contact an accountant when management cannot see a reliable view forward.
Is there something you want to know more about? The tax rules can be complicated. At Crescendo Accounting, we aim to make your situation the best for your financial success. We are always happy to discuss your corporation’s tax position, reporting and year-round tax planning.
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