Better cash flow management led to a 36% jump in sales
The result has been a 36% jump in sales at Bonté’s meat division since 2009. Company gross profit margins are up almost 6%.
Not bad for a company that was forced to seek the help of BDC’s Business Restructuring Unit, receiving deferral of its loan principal repayments in 2007. (Bonté is now back on solid financial ground and repaying its loans.)
Bonté’s experiences show how complex it can be for entrepreneurs to manage cash flow. Cash flow management takes place on several levels at once—everything from accounts receivable and payable to inventory and expense control, to even bigger questions about your business model.
Create financial projections
Good cash flow management starts with making financial projections and then closely monitoring your actual financial results, says Sophie Gauthier, Regional Director, Special Accounts in Atlantic Canada, who worked closely with Bonté on its restructuring.
To prepare financial projections, you should first think about your plans for the coming year—especially big-ticket expenditures such as buying equipment or acquiring a business. Based on these plans, you should come up with a projected income statement, balance sheet and monthly cash flow forecasts.
Consider different scenarios (optimistic, most likely and pessimistic) so you can plan for the impact of each, says BDC Senior Business Advisor Jorge Henao, who provides advice to entrepreneurs on financial management.
Arrange financing in advance
Your projections should also indicate your financing requirements for the coming year. With those in hand, you can approach your bankers to arrange credit lines or term loans.
As the year progresses, compare your projections to actual results on a monthly basis in order to understand the cause of variances and react properly, Gauthier says. For example, if sales are lower than expected, you could cut expenses, delay discretionary outlays or ask your suppliers for some breathing room.
Poor profit margins can also quickly lead to cash flow problems. Entrepreneurs often fail to account for all overhead costs or simply charge too little to produce an acceptable level of profit.
A bright future
At Bonté Foods, the company put much of this advice into practice when cash flow problems struck in 2006 and 2007. The company improved its profit margins by unloading lower-margin divisions.
“We narrowed our vision to a laser-like focus on meats, our core competency,” Whittaker says.
Realizing its pricing didn’t reflect its costs, Bonté also approached customers to ask for substantially higher prices. Most accepted.
Bonté also hired an outside consultant to study its operations and help it get leaner. This improved both production efficiency and management of accounts receivable and payable. It also led to adoption of just-in-time inventory management.
The changes spurred rapid sales and margin growth, and left Bonté ready to handle unexpected difficulties, Whittaker says. “Now we’re a healthy company with a bright future.”
5 steps to better cash flow management
Collect receivables as quickly as possible, even if you have to offer customers a small discount.
Keep a close eye on your cash flow through the month and compare month-end and quarterly totals to projections.
Use term loans, not working capital or your line of credit, to pay for capital assets such as equipment, machinery or real estate projects.
Seek to extend payment terms, but remember it takes two to tango. Work on improving your supplier relationships.
- Arrange financing ahead of time—not when cash gets tight.
To find out more about cash flow management and read real-life entrepreneur stories, download your free copy of BDC’s eBook Master Your Cash Flow: A Guide for Entrepreneurs.