Five Easy Ways To Get Customers To Pay Quickly

Everyone has likely heard the phrase “cash is king.” Cash is the blood in a business and it’s critical that it keeps flowing. Cash flowing out of your business is within your control, but where things get tough is cash coming into your business (you can’t always force customers to pay you on demand). Here are five tips that I’ve found to be very effective in keeping customer payments flowing:

1. Provide a clear quote at the beginning: if a statement of work and price is agreed upon at the beginning, it’s difficult for a customer to question something later on.

2. Invoice quickly: It’s easy to put this on the back burner with all the other paperwork you have to do, but make time to get your invoice in the customer’s hand right away. This helps reduce the time it takes for them to pay you.

3. Follow up right away: After you send the invoice, do a separate email/phone call to talk about the work performed, to make sure everything is satisfactory and answer any questions. You also slide in a question to confirm they received the invoice. This step reinforces your customer service (no one calls after the sale to make sure things are fine) and it confirms they have the invoice in hand (how many times have we all heard “I didn’t receive it”).

4. Proofread your own invoices: Make sure your invoice has your correct address, price, HST number, HST amount, payment terms (do they have 30 days or pay right away), and what forms of payment you accept (i.e. credit card, EFT, cheque). A clearly laid out invoice helps avoid any mix-ups.

5. Track your invoices: Every accounting program has an Accounts Receivable chart that lays out all the invoices outstanding and how long they have been outstanding. If the invoice has been outstanding too long don’t be shy about following up (rule of thumb is once an invoice is past due it’s good to call. The longer an invoice is outstanding the less likely it is to get paid, so if too much time has passed and you still haven’t been paid you need to get more aggressive in collecting your money (stop emailing and start phoning, stop in for a visit, or use a collection agency). The squeaky wheel always gets the grease, so if a customer is having cash flow issues and not paying everyone, chances are you’ll get paid before most just because you’re asking.

Every industry and business is different, so these tips may need to be adapted for your business. This list is not exhaustive, so if you want help improving cash flow feel free to call for personalized guidance.

What's The Return On Your Marketing?

Marketing campaigns are investments. Like any smart investment, they need to be measured, monitored and compared to other investments to ensure you’re spending your money wisely.

With a solid return on investment (ROI) calculation, you can focus on campaigns that deliver the greatest return to your business (and make you the most money). Calculating the ROI for marketing is easier than you think.

Step one: Filter out the opportunity if it doesn’t target your ideal client. If you sell wedding dresses buying a booth at a hardware show is not a good idea.

Step two:  You will need to calculate your gross profit which involves some basic math with numbers from your income statement. You’ll need sales and your cost of goods(COGS).

Gross Profit  =  Sales – COGS             

Gross profit is how much you retain after you pay for the item you sold. For example, last year you sold $1,000,000 worth of product and your COGS were $500,000.

$500,000 = $1,000,000 - $500,000   

This tells you that for every dollar in sales you retain fifty percent.

One day a new salesperson talks their way into your office and pitches you an opportunity to advertise on a new TV show and promises you a huge jump in sales if you do it. Since you know that talk is cheap you do some digging on your own (asking fellow business owners, google search etc) and you estimate the ad will bring in an additional $50,000 in sales. The salesperson keeps calling and tells you since the ad will only cost $25,000 it’s a great deal and you make $25,000 for no extra effort, not so fast. Since we now know the gross profit on this opportunity is $25,000 (50% of $50,000). The best formula for calculating marketing return on investment is:

ROI Marketing =  (Gross Profit – Marketing Investment)/Marketing Investment

                                  0  =  ($25,000 - $25,000)/$25,000

It turns out this marketing opportunity has no positive return (you would be better off leaving your money in your bank account collecting interest or search out some other advertising opportunities).  

Using ROI helps you justify marketing investments. In tough times, companies often slash their marketing budgets, which can be a dangerous move since marketing is an investment to produce revenue. Every company and industry are different, therefore ROI isn't always this easy to calculate. If you have any questions about this or want a professional to help you give us a call. 

Three Reasons to Report Your Business Income (Avoid Under-The-Table Earnings)

So let’s be honest, we’re taxed to death in Nova Scotia. And the more you make, the more you pay. Anyone who is sane hates paying tax, but it’s every kind of very illegal to not pay it. As a business owner, you have the opportunity to sneak earnings from your business directly to your pocket and no one is the wiser. Although it is understandable why you might consider doing this, there are good reasons to play by the rules and declare what your business really makes.

Selling Your Business: The first thing a potential buyer will want to see is your financial statements. If your business isn’t making much money, don’t expect to sell it for much.  Buyers want businesses that make money, not businesses with two sets of books. And if you’re a buyer of a business with two sets of books, please call me; I have a lovely piece of land for sale in Honduras.

Growing Your Business: If you want to grow your business by buying a competitor, equipment or buildings, you’re going to need money. Bankers can’t lend you money based on under-the-table earnings; they need to see tax returns and financial statements. Telling your lender you stole money from your company to avoid taxes isn’t going to help the situation, they need to see a business case for lending money.

CRA Isn’t Dumb: Everyone knows of a business owner who brags about how they siphon money from their business. They live in a great big house, drive a great big vehicle, and have a great big boat. There’s a good chance someday you’ll be able to go to a great big tax auction and buy all their stuff really cheap. CRA has been in the tax collection business for a long time and they have lots of methods to follow the money trail. Maybe you get caught in a random audit, or maybe something on your tax return raises suspicion. You’ve heard the expression “like a dog on a bone” – well, that’s how the government feels about money. Unless you plan to live under a rock for the rest of your life, chances are high that the government will eventually find a way to get its money out of you.

If you’re concerned with how much tax you’re paying, talk to an accountant to make sure you are taking advantage of the proper business deductions and tax credits. There are many ways to legally minimize the amount of tax you pay.

Tis The Season For Monthyl Cash Flow Planning

Now that the holidays are over, we all have New Year resolutions to make more money and get back into shape. This is the time to seriously look at your business and consider where it’s going financially. Unless your business is snow removal or snow tires, chances are you have some extra time to run a few quick numbers and plan for any cash shortfalls in your business. Remember, the only reason businesses close is because they run out of cash.

Planning doesn’t have to be fancy but it does have to be effective. Don’t spend endless days on it, but make sure it’s accurate (you’re only cheating yourself if you don’t).

The key thing to remember during this process is that cash flow is different from an income statement. An income statement shows how much revenue you made and how much your expenses were. A cash flow forecast takes into account the timing differences between when you make sales and receive money from customers, versus when you must pay your suppliers and pay operating expenses.  

Step #1: An easy way to start is to look at last year’s monthly financial statements, which will show you the seasonality of your business (in other words, the ups and downs in revenue throughout the year).  To help forecast incoming cash, have a conversation with your marketing and sales teams; they will be able to guide you through what to expect for sales and any headwinds you might experience (you want to be realistic). If you make a sale in March and the customer has 30 days to pay, don’t expect to see this money until April. It is important to manage your sales and collections to make sure cash consistently flows into your business.

Step #2: Next, input the money that will be flowing out of your business. Chances are most of your operational expenses are the same each month (e.g. lease/rent, salaries, utilities). Be sure to input when you will pay the bill, not when you receive it (remember this is different from an income statement). Don’t forget to also take into account all payments on debt, dividends, or any one-off expenditures like equipment or vehicles.

Step #3: Finally, some simple math. For each month, the bank balance + inflowing cash - outflowing cash = what your cash position will be at the end of the month. At the end of every month, you should compare what your cash flow actually was as compared to the forecast and continue to improve your forecast. If cash flow is getting tight, do a weekly or daily forecast to better watch your pennies.

You now have a forecast of what your cash flow will look like for the year. Here comes the hard part: how are you going to manage shortfalls and surpluses to maximize your business? If you feel like you’re getting in over your head with this exercise, call an Accountant to help crunch the numbers. Even if an Accountant prepares your cash flow forecast for you, it is crucial that you understand it and review it regularly so you can properly plan; otherwise you are simply relying on luck to carry you through. 

HST Advice - Straight from the Taxman Himself

Recently I had the opportunity to have coffee with none other than The Evil Tax Man (who was actually really nice). This arose from a surprise phone call I received from CRA, wherein they apologized for dropping the ball in processing an HST filing from 2012. They simply needed copies of a few basic documents to rectify everything (and, like every business owner, I just had to dig them out of my massive box of unorganized paperwork). 

The CRA rep and I arranged to meet at Tim’s, which gave me the opportunity to ask lots of questions. As a safety precaution, I did have garlic in my pocket :).  Here are a few of the best tips he gave me:


Keep HST in a Separate Bank Account

When businesses collect HST from customers, they hold the funds for the government before they must remit them. Open a second bank account to keep the funds separate from the general operating bank account. All too often businesses use HST in general operations as they collect it (sometimes due to poor cash flow) and then have problems scraping funds together later on to pay the government. In other words, the funds get used like a line of credit, very often businesses begin to fall behind in their remittances, and the black hole starts. Even if the business goes bankrupt, HST that is owed to CRA is never forgiven nor forgotten, and the business owner is personally on the hook for it. By keeping HST in a separate bank account, you avoid this headache (and avoid a false sense of security from artificially propping up your business with the HST you collected).


Board of Directors can be Liable for HST

Too often members of the Board of Directors don’t realize they can be personally liable for HST and employee remittance payments. Even if you’re not involved in the day-to-day operations of the business and the business is incorporated, you’re not immune. Before joining a Board, make sure they are up-to-date on HST filings and all source deductions (i.e. CPP and EI) have been remitted; then make sure they continue paying HST and source deductions while you sit on the Board.


Don’t Bother Trying to Hide

Apparently when people receive letters or phone calls from CRA, they usually ignore them and assume the taxman will just go away. Seriously. If CRA calls asking for information or clarification, just answer the questions or provide the requested paperwork so they will stop phoning.  Keep in mind that you’re dealing with the revenue-collecting arm of the Canadian Government, not that sketchy captain who keeps calling to announce the free cruise you won if you’ll just give your credit card info. CRA has the power to freeze accounts, seize property and issue heavy penalties. Unless you plan to live completely off the grid for the rest of your life, never collect a GST refund, never collect universal child care benefits, and never collect on your RRSP, then CRA is going to catch up to you eventually. Chances are the rep you’re dealing with just wants the file closed, and then everyone can move on.

If you have any questions, don’t hesitate to ask.


Easy Way To Increase Profitability

An easy way to increase your profits is to figure out exactly where they are coming from. Almost every business deals with at least several services or products (if you’re in retail this is likely into the thousands of products). Commonly it is assumed that as long as you are selling the product for more than what you paid for it and business expenses are being covered, then everything is fine; not so. You need to look at all the expenses attributed to that product to calculate the true cost.

For example, let’s say you own a business that sells fire wood and wood pellets. Each product makes up 50% of revenue, they each retail for $10 per unit, and they cost you $7 each. Now look at the associated costs. Since wood pellets need to be kept dry, they use up all of your warehouse space. Now you have to attribute 100% of your indoor warehousing costs to wood pellets. All of your other business costs are distributed evenly amongst the two product lines. Once the numbers are crunched, the true cost of wood pellets are $10 each and only $4 for firewood. This tells you two things; first, your profits are really coming from fire wood sales and maybe you should look at increasing those sales since the margins are good (extra marketing, sales staff, etc); and second, you are only breaking even on wood pellets, so you need to increase the price, reduce expenses operationally or get better pricing from your supplier.

Some of the most common mistakes in (not) attributing costs to products are:

·         Storage (suppliers always give great bulk discounts, but then you have to store the product)

·         Labour (your low cost employees are working on a project but they keep pulling in your expensive employees for help)

·         Productivity (during a 40 hour work week how many hours are staff spending hanging out at the water cooler or on facebook)

·         Post Sale Customer Service (you’re selling a lemon and the phones are lighting up)

·         Shipping (yes you can get it cheaper from China, but then you have to ship it and wait three weeks)

By  having a professional crunch these numbers you can easily increase your profits and set up a road map so you can continue to evaluate your own progress.