Terms to Understand and Strategies to Help Small Business Avoid Bankruptcy

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Terms to Understand and Strategies to Help Small
Business Avoid Bankruptcy

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• When people start companies, no one sets out with
  the idea in mind that eventually theyll go
  bankrupt. Bankruptcy is often a combination of
  unforeseen circumstances and a lack of
  professional advice one of the main reasons
  that a company goes bankrupt is because they run
  out of operating cash to pay their monthly
  expenses, and stop paying their bills. When you
  have a reliable and knowledgeable accountant on
  your team, avoiding bankruptcy becomes a part of
  your strategic plan from the beginning. Here at
  Kent Accounting weve provided some of the terms
  that are important for every business owner to
  know regarding bankruptcy and some starter
  strategies you can implement to help you avoid
  it!

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• Creditors
• Formally, bankruptcy is what happens when a
  business is unable to pay creditors (those
  parties whom have lent the company money) and
  those creditors choose to take legal action by
  suing the company for the money that is owed.
• Assets
• When a company goes bankrupt, the first step is
  to sell off all the assets of the business. This
  can happen in many ways, but is usually done
  using a court appointed trustee, who oversees the
  sales process, and the proceeds are then
  distributed amongst the creditors by the trustee.

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• Profit versus Cash
• The terms profit and cash are not
  interchangeable. If a company earns 10,000 in
  revenue in a month, and has 8,000 in wages and
  other bills in that month, then they earn a
  profit of 2,000. However, as we all know, our
  clients like to pay us after 30 days (or more),
  but our employees usually want to get paid after
  one or two weeks. The cash flow for the month
  will depend on how much money was collected from
  prior months sales in the month and it could
  turn out that the business may actually lose cash
  in the month, despite earning a profit.

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• Kent Greaves, CPA, CA of Kent Accounting, gives
  us this example to help explain how small
  businesses can find themselves overwhelmed by
  their profit versus cash situation
• Take for example getting a big order or project
  that starts on January 1 and you estimate that
  order will take a year to complete. Your initial
  cash outlay (for payroll and materials) would
  likely be in January with continuing cash outlays
  each month for additional payroll/materials. If
  the project completes in December, normal payment
  in Alberta would be 30 90 days, with some
  larger companies taking as long as 6 months to
  pay. This puts 18 months from your first cash
  outlay to receipt of all of the cash related to
  the project. It is imperative that you map out
  the cash outlays your project will incur and
  incorporate progress payments into your
  negotiations with the prospective client.

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• So what goes hand in hand with small businesses
  taking on larger projects? Running into cash flow
  problems, which can lead your company directly to
  bankruptcy. Here are just a few suggestions on
  how to avoid cash flow problems
• Project Size When you are pitching to larger
  companies or responding to requests for
  proposals, ensure that your company is in a
  position to take on the additional work load.
  When considering, take into account labour costs,
  materials, and especially the drain on cash flow.
  Working closely with your small business
  accountant on these proposals will ensure you can
  deliver what you are promising. Unsure about how
  much more work your small business can handle?
  Contact Kent Accounting so we can help you
  accurately understand your capacity.

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• Cash Flow Forecast With your accountant, build
  out a basic Cash Flow Forecast, which is a simple
  spreadsheet that lays out your estimated incomes
  and expenses for the year. This will enable you
  to understand the big picture of your business,
  and what kind of resources would be required on
  monthly basis to take on more projects and grow
  your business. BONUS Download our Kent
  Accountings basic Cash Flow Forecast excel sheet
  to get started. Have questions? Dont hesitate to
  reach out to our team.
• Contracts Set up a contract (a written one!) for
  every project over a certain dollar amount (e.g.
  1,000). There are many contract templates
  available and your small business accountant can
  help you tailor those templates to ensure your
  business is protected from a financial
  standpoint. Contact Kent Accounting to review
  your current standard contract template.

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• Payment Terms One thing smart small business
  accountants do is help business owners set up
  appropriate payment terms. An example of standard
  terms could be requesting 25 of payment up
  front, 25 half way through the project, 25 when
  the project nears completion and 25 upon client
  acceptance of finished product. Every business is
  unique and its best to consult with a small
  business accountant to make sure the payment
  terms youve set up are appropriate for your
  business and industry contact Kent Accounting
  today for advice on payment terms.

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• Credit Policy Simply put, a credit policy is a
  defined time-period for payment of goods and
  services and it is something many small
  businesses overlook when they are setting up
  their company. In the early stages of every
  business, finding a balance between generating
  new business and ensuring you do work with
  companies that will pay you promptly is critical.
  While setting up a Credit Policy isnt difficult,
  what can be difficult is enforcing it. There will
  always be exceptions to your policy, but if you
  ask and expect your clients to abide by your
  policy, then you significantly reduce your risk
  of low cash flow and bankruptcy. To ensure your
  credit policy is thorough enough to get you paid,
  contact Kent Accounting.

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• Connecting with an accountant who specializes in
  small business is the first step to protecting
  your business from cash flow problems and
  bankruptcy. For a review of your current
  policies, dont hesitate to connect with Kent
  Accounting.

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• Kent Accounting is a full service accounting firm
  located in Calgary, Alberta. The firm is lead by
  Kent Greaves, a Chartered Professional
  'Accountant in Calgary' with over 18 years of
  experience working with privately owned
  companies. Our 'small business accountants in
  calgary' believe in prompt, accurate service at
  affordable rates. Running a small business can be
  the most exciting endeavor and the greatest
  challenge a person can undertake were here to
  help you succeed.