Working Capital, Cash Flow, Liquidity – It Is A Matter of Life or Death

DSK Profitable Wisdom_image of business person

You are a business owner, no matter what your business looks like. You may own a multi location corporation supported by many employees. You may operate as a self employed real estate agent, plumber or consultant. One thing you have in common with all of your peers is this – your business will live or die because of cash flow.

The phrase “the buck stops here” is the culmination of many facets of your business, such as: the good or service that you provide, the demand for that good or service, the revenue that you will receive, the costs (direct and indirect) that will be incurred, the timeliness of receiving your money versus how fast you pay your costs, and the money used for purchasing things such as computers, furniture, equipment, supplies etc. Every one of these activities needs to be identified and analyzed in more detail.

Profit does not equal cash flow. Profit is the net result of your revenues less your expenses based on accrual accounting. This means that revenue is reported when the sale occurs, not when the cash is received for the sale. Expenses are also recorded when occurred, not paid for – such as employee wages, purchase of materials etc. You may show $50,000 in profit but your available cash was used for inventory, capital assets or expenditures required for the business. Unfortunately, income tax on that $50,000 is still payable. Did you plan on that? Did you know that was going to occur?

Understanding your cash flow lets you know what cash you have available and what demands for that cash are coming. If your accounting records are up to date and your financial statements are set up properly, then here is one quick ratio you should know and calculate often for your business: WORKING CAPITAL. Subtract your current liabilities (accounts payable, wages payable, HST payable etc.) from your current assets (bank, accounts receivable, inventory etc.). If the result is positive, you have a positive working capital, which technically means that you have (will have) enough cash to pay all of the current liabilities outstanding.

To fine tune this and to give you a better idea of your liquidity, do the same calculation but do not include inventory as part of your current assets. This ratio allows for a “quick cash” result since inventory takes time and sometimes more money to liquidate. I could go on forever as this topic is vast. What I will leave you with is this – you run your own business and your business will survive or die based on your cash flow. The buck does stop with you.

We love to work with our clients and help them to REALLY understand their financials. We offer bookkeeping, accounting and tax (Canada & USA) services. With our newly launched DSK Profitable Wisdom division we now also offer outsourced CFO services. We believe that a fully integrated finance division allows you the knowledge, insight and comfort of knowing that all your finance and tax needs have been addressed, leaving you more time to grow your business profitably and cash positively.

If you are not currently running your business with this sense of comfort, give me a call.  I would love to sit down and have a chat with you.



Paul Drouillard, ACIS, P.Adm, CPA, CGA
Partner – DSK LLP &  DSK Profitable Wisdom LLP
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