Improving Cash Flow Strategies

Cash Flow Importance

Why is cash flow so important for a business? A simple answer to this question is, without proper cash management no business can survive and resultantly leads to trouble with creditors and ultimately in bankruptcy. Therefore, it is safe to say that cash is the lifeblood of a business. A very popular saying is “cash is king” in every business.

It is important for a business to understand the requirement of its cash flow which allow in making wise investments and protecting the company’s future growth. How do you know that you have enough cash to survive?  Some of the strategies can be utilized to manage cash includes monitoring daily cash position, utilizing proper accounting techniques for receivable and payables, budgeting, cash forecasting, preparing monthly or even weekly cash flow for medium to large size businesses.

A well planned cash flow management will help a business to:

• - Maintain its liquidity to pay its debts and payable
• - Comply with bank covenants
• - Helping during the downturn time
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Warning Signs

• - No positive cash flow for several months
• - Receivables are over 60, 90 days
• - Payables are over 60+ days
• - Unable to pay yourself
• - Borrowing against credit cards
• - Inventory levels are going up
• - Dipping into your retirement savings plan to overcome the cash shortages
• - Home refinancing to meet routine expenses
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Tips to improve cash flow

• - Maintain your books regularly, invest in a proper accounting system
• - Utilize net 30 days option to pay your bills
• - Invoice regularly and collect them faster or offer some discount incentives so customers pay your bill faster
• - Maintain your inventory, don’t invest too much cash unless there is a strategic reason for that
• - Check your prices, a proper pricing strategy can be adopted to make sure that you are maintaining your sales
• - Strategically evaluate renting vs. leasing and/or buying vs. manufacturing options.

 

Most small businesses close their business doors after one year because they failed to manage or implement a proper cash management system.

CNC can help you to evaluate your cash-flow needs and implement a strategy to manage your cash flow effectively and efficiently which is critical for your business survival and growth.

Income Splitting with Minor Kids

One way to reduce your taxes is to split income with your family. This is one of the popular tax planning strategy. Under this strategy, you hire your children and pay them salary which is deductible to your business as long as wages are reasonable in relation to the services they have provided. CRA checks the reasonability of the amount in terms of what would you pay to an arm’s length party for similar job.

Some of the jobs that a kid can perform including:

-          Cleaning office

-          Washing automobile

-          Mailing letters

-          Products delivery

-          Data input

In some cases these expenses can be denied by CRA.  In one of Tax Court Case Bradley v The Queen, TCC 2006 500), CRA challenged the expenses. In 2001, Nancy Bradley, employed her daughter who was 8 year old and her son Mathew who was 12 years old. She paid them salary $2,000 and $5,000 respectively. Nancy claimed these payments as salary expenses on her taxes. CRA said these payments were not based on the duties they performed or the hours they worked and lastly, they are not reasonable, therefore, CRA denied these expenses. Nancy and kids said these are legit and payments were made however, judge ruled in the favor of CRA since mom had the control over funds withdrawal and kids did not have full control over the funds. So a lesson we learned is:

-          Payments should be reasonable

-          Work description should be in place ….. what they did

-          Working hours record should be maintained

-          A separate bank account should open under the kids name on which they should have a sole discretion to withdraw the funds

Foreign Income Verification Statement (Form T1135)

Canada Revenue Agency announced a change to form T1135 Foreign Income Verification Statement for taxation years ending after June 30, 2013. The purpose of this move is to crack down on international tax evasion and aggressive tax avoidance as laid out in the 2013 Economic Action Plan. Individuals, corporations, trusts, and certain partnerships, that, at any time during a year, own specified foreign investment property costing more than $100,000 must file a Form T1135 by the filing due-date of their income return . This applies even if the taxpayer has no tax payable during the year. If you own specified foreign property in excess of $100,000 and fail to file Form T1135, you could be subject to late filing penalties of $25 per day to a maximum of $2,500 per year. For more information read here