What is a bad debt expense?

When a buyer doesn’t pay in full, you can make a note of the amount you’re unable to recover in your business’ financial record. This is a bad debt expense. 

Unfortunately, dealing with non-paying buyers is a common problem among small- and medium-sized businesses in Canada. The best way to protect yourself is to accurately record your losses to contain the damage. 

Why should I keep track of bad debt expenses?

When you invoice a buyer for their purchase, it’s recorded as a sale in your books. If you’re not paid for that transaction, your overall revenue is actually less than indicated by your accounts–and you have to pay tax on your revenue. When you record unrecovered income as a bad debt expense, you officially remove all or part of that sale from your revenue which means that you won’t have to pay tax on it. This is entirely fair and legal–you don’t pay tax on income earnings you never received. 

How to calculate your bad debt expenses

There are two ways to calculate bad debt expenses: the direct write-off method and the allowance method. 

With the direct write-off method, you simply charge the amount of the unpaid invoice to the bad debt expense. This removes the amount from your accounts receivable, reducing your taxable income. This is the simpler method and the most commonly used by Canadian businesses.

What can I do to start developing a plan for growth?

Deciding to grow your business is a big step, so take a moment to congratulate yourself. Now, let’s get to work. The first thing to do is to develop a plan, and these five strategies can help.

1. Take care of your cash flow

Just for everyday operations, businesses need to have a steady flow of capital coming in and going out, but the importance of your cash flow intensifies when you’re planning to expand. 

Survey your income and expense reports to determine your current cash flow, and identify trends so you can estimate how much you’ll have in the future. Don’t stop there. Make sure that you return to this information regularly to ensure you remain on the right path. 

Should you find yourself in a cash flow crunch, you can consider a business line of credit so you can continue to take care of your responsibilities. Alternatively, you can take out a small business loan. 

2. Invest in marketing and sales

It’s common for sales and marketing costs to fall to the bottom of a small business’ priority list, but they’re an absolutely crucial investment, especially if you’re expanding. Bear in mind that marketing and sales strategies and tactics can be tailored to your business’ unique needs, so you’ve got a variety of options to choose from–all with different budgets. Consider your audience, sales goals, and business forecast to build regular (think monthly) marketing efforts into your long-term plan. Marketing your business is an investment in its success. 

3. Attend to your core audience while attracting new customers 

Expansion often involves courting new customers, weather from different market segments or simply additional regions. It’s important that during the growth process resources and attention aren’t stolen from your core customers. They’re the ones who got you here, after all. 

One way to give everyone the attention they deserve is to break your audience (and marketing dollars) into distinct segments and sell each according to their wants. Be open to different configurations. For example, depending on the situation you might want to serve everyone under a single brand, or develop distinct brands for different segments. 

4. Confirm your supply

Few things can turn customers away faster than hearing you don’t have the products or services they need. Supply chain issues and slow delivery since the pandemic have put an increasing number of businesses in a precarious position when it comes to meeting customer demands, so your expansion plans should include the establishment of relationships with multiple reliable suppliers. Your efforts in advance demonstrate good business practices and respect for your customers. Plus, positive relationships with multiple suppliers can help you with your expansion goals. 

5. Ensure quality and consistency 

It should go without saying, but the last thing you want to happen when you expand is to have your quality or customer experience decline. Plan against this by establishing production, operations, and customer service standards. .

You have a better chance of expanding successfully if you plan carefully in advance. Attend to your finances, marketing, suppliers, and customers in advance to make sure you’re growing on a solid foundation. 

Speak to an iCapital advisor about small business loans or lines of credit to ensure steady cash flow during your expansion process. 

What Is Working Capital?

When your company needs products or services in the short-term, you use working capital to pay for it. Unlike cash flow, which refers to money going in and out of the company, working capital is a snapshot of a company’s financial health. You can figure out what your company’s working capital is by looking at the value of your company’s assets minus your liabilities. This is the amount of money you have on hand to meet immediate expenses–in other words, your working capital.

Why is it important?

It’s obvious that a company should have the working capital it needs to pay its employees and purchase inventory, but your available working capital is also a good measure of your company’s overall financial picture. If you have access to sufficient or even plentiful working capital, you can rest assured that you have the resources to manage your upcoming expenses. If your working capital is low, you can run into problems.

Additionally, working capital is essential in helping businesses maintain and grow their operations in the future. With enough working capital, a business can cover its expenses even if there are outstanding payments from customers. In the best-case scenarios, businesses can use extra working capital to reinvest in their operations by buying additional inventory, launching marketing and promotions, and hiring additional staff. 

Every business should strive to have ample working capital, but this can be a challenge, particularly in times of economic downturn.

4 Tips To Improve Your Working Capital

1.Get a Cash Flow Forecast

It’s easier to get where you want to be if you have a clear picture of where you are. A cash flow forecast is a financial projection that shows how much money your company can expect to receive and when. Make sure you look at revenue, expenses, and net cash. With this information, you can make better, informed decisions about spending. 

2.Automate Business Processes

Your working capital relies on receiving payment, so it makes good business sense to streamline the invoicing process. Using an automatic invoicing system, particularly one that’s tied to the delivery of your product or service, will free up time and, importantly, ensure your invoicing isn’t delayed due to busy employees or time constraints. The ability to track your invoices can make your working capital more predictable, which will allow you to make educated decisions about spending.

3.Incentivize Receivables

If you run a small- or medium-sized business, you’ve experienced late payment, or even worse, no payment at all. Following up with outstanding invoices is time-consuming and frustrating, so it’s smart to bake in incentives for customers, suppliers, and vendors who meet their obligations. Incentives could be monetary or symbolic in nature. The idea is to encourage good business practices while fostering positive relationships.

4.Improve Inventory Management & Avoid Stockpiling

Inventory management is the process of matching your company’s inventory to expected sales. The trick is to make sure you have enough–but not too much. Stockpiling inventory is expensive, and money tied up in overstock can’t be spent on more immediate needs. Consider investing in a digital solution.

Access to sufficient working capital is a great indicator that your business is healthy, and a healthy business is one that’s positioned to grow and take on new opportunities.