1. Business Banking
Maximizing Cash Flow
Out of Your Business
Cash flow is the lifeblood of your company and it needs to
be managed just as effectively as sales and profitability.
The art of managing cash flow is to
maximize the inflow of cash to the
company and control the outflow,
allowing the business to pay its current
bills on time while minimizing the need
for short-term financing.
This report outlines a range of strategies
and services that companies use to
carefully control the flow of cash out. It
should be read alongside Maximizing
Cash Flow into Your Business, which
outlines ways to control the flow of cash
into your company.
By using the established cash flow
management techniques outlined
below, you can improve your company’s
ability to meet its current financial
obligations while maintaining
professional relationships with
customers, suppliers and financiers.
Controlling Cash Out
Just as you want to get paid as quickly as
possible and turn cheques and other
promises to pay into cash, you don’t
want to pay a day sooner than you have
to unless waiting will cost you money or
you can earn a discount for making an
earlier payment.
By watching the outflow of funds, you
can minimize your need for outside
financing while staying within the terms
set by those to whom you owe payment.
Here are eight ways to help you control
your company’s cash outflows:
1. Know your current cash balance.
2. Have funds on hand to cover your
cheques.
3. Use credit cards instead of cash
advances.
Emad Ghali
Senior Account Manager Business
& Personal
Royal Bank of Canada
2157 Guy Street
Montreal, QC H3H 2L9
Cel: 514-462-2184
emad.ghali@rbc.com

2. 4. Set up automated payments to
take advantage of optimum
timing.
5. Choose the most advantageous
payment terms.
6. Manage late payments carefully.
7. Control inventory.
8. Minimize labour costs.
1. Know your current cash balance
The first step in controlling the
outflow of cash is to keep track of
your cash payments. To do this, you
need to reconcile bank statements
against your own records to verify all
transactions.
Online banking applications give you
immediate access to all deposits and
cheques as they pass through your
account. You can easily determine
which cheques are still outstanding
and whether you can make further
payments from the funds you have
on hand.
For companies with multiple
accounts, possibly in different
currencies, more robust banking
systems offer additional services and
control. Contact your RBC®
Royal
Bank representative for details.
2. Have funds on hand to cover
your cheques
When you issue cheques, make sure
you have enough money in your
account to cover them. Be prepared
for your cheques to clear quickly and
return to your bank for settlement.
The cheque clearing system in
Canada is already one of the most
efficient in the world, and it’s about
to get faster as more parts of the
cheque cashing process are
computerized.
3. Use credit cards instead of
cash advances
Ensure employees use business
credit cards and not cash advances
for travel, accommodation, meals
and miscellaneous expenses. Other
than the card’s annual fee, you get
the use of this credit free during the
grace period as long as you pay it off
by the due date. Speak to your RBC
Royal Bank representative about an
RBC Royal Bank®
Visa* Business card.
4. Set up automated payments
You can control your cash flow by
electronically scheduling deposits to
your chequing account to occur on

3. the due date or in time for discounts,
minimizing interest costs and
avoiding late payments. You also
avoid the cost of issuing cheques.
Direct deposit is the perfect vehicle
for recurring payments to utility
companies and regular suppliers. You
can also use it to pay employee wages
and salaries or, if you outsource your
payroll, use it to pay expenses and
bonuses. Some businesses also find it
useful for paying tax installments.
5. Choose the most advantageous
payment terms
Many suppliers offer a discount for
early payment. For example, if an
invoice states terms of 2%/10, net 30,
you can take a 2% discount for
payment within 10 days; or pay the
full amount within 30 days.
Should you pay early and take the
discount or wait to pay in 30 days?
Here are some factors to consider:
> If you pay in 10 days, does the
discount cover any additional
borrowing costs? Do you have
room on your line of credit to
cover it?
> If you are using surplus funds to
pay early, will the discount cover
the lost interest you could earn?
> Do you have more expensive debt
to pay down that could save
you more than the discount?
6. Manage late payments carefully
Whether it’s due to unexpected
emergencies, incorrect assumptions
in cash flow planning or a comb-
ination of both, growing businesses
may find it necessary to delay
payment to suppliers.
Communicate with these business
partners to maintain the best
possible relations. Tell them what the
problem is and when they will be
paid. You may consider making a
partial payment to show goodwill.
Don’t make late payment a habit.
This could result in restrictions on
future credit. Go back to your cash
flow budget, update your forecast
and revisit your operating line and
other financing arrangements.
7. Control your inventory
Inventory typically represents a large
part of working capital for businesses
that manufacture or distribute
products. Therefore, your inventory
represents a drag on your cash flow
until you turn raw materials into cash
from goods or services sold. Calculate
your inventory turnover ratio to
monitor whether you are keeping too
much inventory and tying up too
much capital. The formula is:
Number of inventory turns = Cost of
goods sold/inventory
A higher number of inventory turns
means that you keep a smaller
amount of inventory on hand
compared to the amount you sell,
which means you have a smaller
amount of cash tied up in inventory.

4. Compare your inventory turns to others
in your industry to get an idea of how
well you are balancing inventory and
sales volume. If your inventory turns are
too low, consider a clear-out sale or
promotion to get access to the tied-up
cash. You may also wish to pursue
just-in-time inventory initiatives with
your suppliers or simply cut back on
your future purchasing.
The following inventory management
techniques may help you free up
additional cash:
> Tie inventory levels to predicted sales
levels. Go back regularly to your
sales forecast and cash payments.
forecast Monitor stock levels to
meet the changing demands of the
business.
> Ask about your suppliers’ delivery
capabilities. If they can reliably handle
quick turnaround, consider a just-in-
time arrangement where you carry
less stock and order more frequently
in smaller quantities. Try to schedule
inventory deliveries as closely as pos-
sible to the time when you will use it.
> Identify which items contribute the
most to turnover, not just
profitability.
- High-volume, high-margin items
are obviously keepers. They sell
quickly and earn a substantial profit.
Consider just-in-time delivery.
- Low-volume, high-margin items
may be candidates for reduction
of stock levels. They are highly
profitable but you don’t sell a lot
of them. Again, consider just-in-time
delivery.
- High-volume, low-margin items may
also be candidates for reduction.
They sell rapidly, but you don’t
earn much per unit. Consider just-in-
time delivery or elimination.
- Low-volume, low-margin items may
be candidates for elimination if you
can’t raise prices. You may be
keeping them as a convenience to
certain customers, but you don’t sell
many and you don’t earn much when
they do sell.
> Don’t overbuy. Know your cost per
square foot of warehousing. Calculate
your borrowing cost per quantity of
inventory.Weigh these costs against
discounts for large orders.
> Create an inventory schedule.
Develop an inventory schedule to
reduce and eliminate inventory as it
ages. Getting rid of slow-moving
inventory and concentrating on the
winners will help you regain use of
the working capital tied up in goods
that don’t sell.
8. Minimize labour costs
Labour costs are typically the biggest
cost item (after taxes) on the income
statement. Hire cautiously, usually after
considering independent contractors
and outsourcing. Look for ways to
maximize productivity of existing
workers. When you do hire, train them
and pay them a fair wage, not just
because it’s the right thing to do but also
because employee turnover is costly and
wasteful and has a direct effect on both
cash flow and profitability.
Managing cash in and cash out
A business thrives on its ability to make
sales, but it survives on its ability to pay
its bills.
While your cash flow projection predicts
cash needs, you need to manage cash
flow actively and effectively to ensure
you have the cash on hand to meet those
needs. Cash-flow management ensures
that cash flows into and out of the
company as expected, minimizing the
need for short-term financing.
The strategies, advice and technical content in this publication are provided for the general guidance and benefit of our
clients only, based on information we believe to be accurate at the time of publication, but we cannot guarantee its
accuracy or completeness and errors and omissions may occur. This publication is not intended to provide specific
financial, investment, tax, legal, accounting, managerial or other advice for you, and should not be relied upon in that
regard. Readers should consult their own professional advisor when planning to implement a strategy. This will ensure that
individual circumstances have been considered properly and that the strategy is based on the latest available information.
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