KPMG is one of the largest accounting, tax, and financial services firms in the Hamilton region. Their offices in Hamilton operate as a single business unit to serve clients in the region and beyond. As the face of Hamilton’s economy has changed, KPMG has recognized the changing needs of small businesses and entrepreneurs in the region.
Every day, KPMG people play a vital role in helping organizations create value. In supporting Innovation Factory and LiON’S LAIR, KPMG provides special services and advice to our growing startups.
We recently asked 2017 Lion Ruth Todd (Partner, KPMG Enterprise and Office Managing Partner, Hamilton and St. Catharines) to share some financial tips for entrepreneurs. She shared valuable advice on understanding the importance of cash flow. Understanding your “cash position” is key to maintaining a good relationship with your bank and investors long-term.
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Understanding cash position is the key to success
Understanding your current cash position, accurate cash forecasting and communication with bankers, investors and other sources of funds is critical to long-term success of a business, particularly in turbulent economic conditions. In other words, now more than ever “cash is king” and understanding your cash flow is critical to your survival.
What’s equally critical is understanding where your cash is coming from and where it’s going, not just today, but also tomorrow, next week and next month. Forecasting is a business owner (and banker’s) best friend when it comes to cash management. Some business owners assume that if the bank is happy when times are good, that joviality will extend to when the climate becomes a little more difficult and can be surprised when the relationship goes south.
One of the biggest sore spots for bankers is a lack of focus on cash flow, working capital management and cost reductions since all three contribute to reduced profitability and increased losses.
Once your cash sources are clarified, it is important to maintain accurate cash flow forecasts. They are critical to keeping control of your business and they are even more critical in your ability to show your lenders that you are keeping that control. When you do budgets and forecasts it allows you to communicate to the bank and if there’s one person you want to communicate well with – it’s your banker!
Besides keeping the banks happy, good forecasting – usually 3-4 months out, maintained on a regular basis and updated to actual regularly (daily if necessary) – will provide early warning signs that your company may be nearing a “cash crunch”, when cash coming in isn’t enough to satisfy both your internal demands and the demands of your lenders. Before that happens, business owners are still in control. Reduce costs, keep interest payments up and pay your principal if you can.
Understanding your current cash position and where your cash reserves will be three months or six months or nine months from now is critical to the long-term success of your business.
The ability to monitor cash flow and forecast accurately is closely tied with the quality of your financial record keeping. The adequacy of accounting records often varies from company to company. Usually it is dependent on the size of the company, the knowledge or education of those in the accounting roles, and the importance management places upon up-to-date and accurate accounting records. Typically, for a small owner-managed business, the accounting records are seen only as being necessary for taxes, or to obtain financing and not seen as an important tool for business decision making.
Over time, I’ve seen a real mixed bag in terms of accounting records. Some owners/management place emphasis on the sales and marketing side of the business – which makes sense when you are starting a business, or pushing sales that need to be pushed. Often this is what entrepreneurs prefer to do, and quite honestly, are naturally good at doing; they believe in their product or service and have the desire to show the rest of the world. The tedious task of getting all of their daily financial data inputted properly is pushed to the side. Records are maintained more in a reactive manner (have to get that HST return filed tomorrow!) rather than proactively. This can work in the short term, however, not knowing the specifics of the business’s financial position on a regular basis will catch up to the owner eventually. Expenses can get out of hand, accounts receivable may go uncollected, accounts payable unpaid, which sabotages the efforts made to grow the top line. This type of situation, if left unchecked, can really damage the growth potential of a business.
When a company’s results are consistent year to year, generally that means management is keeping a close eye on results throughout the year, and preparing proper budgets for the years to come. They are using accounting records to look ahead, instead of always looking behind.
As I have heard it said, the focus should be looking forward with just a glance from time to time into the rear view mirror.
Proper accounting records provides information to management that is invaluable to running the business each day. Decisions such as pricing, capital expenditures, inventory levels, just to name a few, are all decisions that need to be made with the help of knowing the answer as to the current financial position of the company, and its future. It should not be a “have to do” but rather an “absolute necessity” for management to analyze and use for daily decision making. The businesses that thrive and continue over time are those with management who agree and understand the importance of maintaining proper accounting records.
KPMG is thrilled to sponsor the LiON’S LAIR gala again this year. It’s truly a great and inspiring evening. LiON’S LAIR is a great program that fosters and celebrates entrepreneurs who are passionate about what they do and what they have created. It’s a natural fit for our firm. It is such an impressive event that shows how strong and committed the business community is to the future of Hamilton and the next generation of entrepreneurs. When we support entrepreneurs, we all win.