Last year I wrote about two reasons why small businesses often fail, but there are many moving pieces in a business. Here is part two in the series about how to make sure your business is healthy.
Are you filing your taxes?
We have some clients who don’t pay the CRA, citing a lack of funds. Cashflow issues happen, but not filing is possibly the worst decision a business owner can make. Penalties for not filing are usually significantly higher than the interest owed. Our advice is to file, then contact the CRA to make a payment plan.
The other thing that can happen if you don’t file is that the CRA may make up its own number for how much you owe. The number will be based on a significant exaggeration of whatever numbers they have on file for you with the expectation that if they gave you a favourable number, you might just pay and never both to actually file.
Bottom line: file your taxes on time. Knowing what you owe is better than burying your head in the sand.
How old is your Accounts Receivable?
One of the points we talk about, especially for medium or larger businesses, is how long their receivables are sitting out. If your clients are taking 60 days to pay, you are financing your payroll and other operating costs for those sixty days and effectively letting your clients borrow from you for two months.
If your business cycle works so that clients normally pay in 50 or 55 days, that may work for you and you can decide on the payment terms as work progresses.
If it’s a small number of clients who are taking longer to pay, you may want to ask for a retainer for part of the invoice or if it’s recurring work, ask for payment up front.
Having clients who take too long to pay can also affect other parts of your business. We had one client who asked how long they were allowed to take to pay their bookkeeper. If you’re taking longer than 60 days to pay your own vendors, they may decide that you’re not worth the trouble and drop you as a client. Depending on the contract, they could actually take you to court.
Depending on the amount owed, they may not be willing to take you to court, but if you take a long time to pay, they will decide you aren’t worth jumping through hoops for and if you ever have an urgent issue or emergency, they may not be willing to help.
Some business owners don’t like to make phone calls to clients who owe them money, so if the business is large enough, it’s worth having someone who’s job it is to follow up. If the business has $1M in receivables, it makes sense to have someone to look at that.
Next month: The importance of keeping your records up to date.