Boy do we love a good term when we see one. Whirligig. It’s the definition for a ‘ whirling or circling course of events ‘. Don’t business owners often feel they are in a constant whirligig of business cash flow challenges – always looking for funding for working capital as their business grows? They certainly are always telling us that.
Let’s examine some ways to both measure and address working capital and cash flow shortages. Our primary focus is on the SME (small to medium enterprise) sector of business in Canada. We should note that larger corporations have access to more sophisticated working capital solutions that include unsecured cash flow loans and mezzanine debt provide by Chartered banks, private equity firms, and specialized commercial financing companies in Canada .There are even some hedge funds in Canada offering this type of working capital solution.
The cash flow lending offered by these firms to larger companies is based on multiples of cash flow and profits, not utilizing the actual asses of the firm as first position secured collateral. Suffice to say that interest rates on these types of loans are very attractive but at the same time come with rigorous credit and size criteria that of course SME sector firms simply can’t meet.
SME firms are focused on more mundane issues, reducing their payables, purchasing more inventories, and meeting employee obligations. When actual working capital runs low of course our whirligig kicks in! It’s the constant battle to replenish working capital.
Working capital for your business consists of your cash on hand, your borrowing ability, and of course receivables and inventory.
The rudimentary way that those textbook guys and accountants calculate working capital is to divide current assets by current liabilities on your balance sheet .We’ve never really like this calculation because it doesn’t truly reflect the flow of funds in an out of your business . (A calculation called the operating cash flow calc does this much better). For instance if your sales are flat or slowing down and your receivables and inventory are building up your working capital current ration calc is higher, but the reality is that your real cash flow is getting worse . And that’s a problem.
Working capital solutions in Canada are available but they are somewhat more limited in nature than many Canadian business owners and financial managers think. Business lines of credit to cover business cash flow for start ups or small businesses rely heavily on the business owners personal assets. Canada’s crown bank corporation offers working capital term loans, but significant emphasis is placed on owner equity and cash flow ratios.
The real world solutions available in Canada in 2011 for funding business cash flow are as follows; sale leaseback of some of your assets, Chartered bank lines of credit, accounts receivable financing facilities, non bank asset based lending facilities (they combine your A/R and inventory and equipment into one business line of credit). Many Canadian firms utilize various tax credits which can also be monetized into cash flow and working capital liquidity.
Speak to a trusted, experienced, and credible Canadian business financing advisor on how you can avoid the whirligig of Canadian business cash flow. In today’s competitive environment you ability to survive is based strongly on ensuring your working capital life blood is healthy.