Managing it… and getting it. That’s two different ways of addressing work capital cash flow in the financing of your company. The importance of cash can’t be underestimated in any business, and how to finance both manage and address the requirements you have is challenging for many Canadian business owners and financial managers.
It certainly doesn’t help that in the current 2011 somewhat volatile economy that the struggle for that cash ‘ lifeblood’ seems as hard as ever. Many clients we meet in the small to medium size sector of Canadian business have the owner or owners of the business spending a little too much time on chasing cash. And borrowing for the liquidity has always remained a challenge.
Business owners realize all to quickly that sales growth demands a lock step in working capital requirements… the bottom line is that your a/r increases, inventory levels rise, and many of those ‘ variable costs ‘ increase also .
That’s where it’s all important for Canadian business to spend some time taking a hard look at their particular cash cycles – that’s the time gap for a dollar to flow back into their company from the time you make a sale. That must be balanced of course against your ability to meet your short term obligations.
So how do you protect and sustain that working capital cash flow? There are two types of solutions, internal and external. Internal solutions will drive a lot of more stress out of your business than you think – it’s simply about focusing on managing receivables and your overall credit and collection policy in a better fashion. Naturally you can slow cash outflow by slowing down your payables, but that’s a fine line to walk when you’re talking supplier and vendor relationships that are key to your company.
So we guess that takes us over to external. Focus one typically for many business managers and owners is to seek a bank facility that meets all their needs. That is of course pretty well the least costly solution when it comes to external financing in Canada – if… ands its a big IF… your firm can meet Canadian chartered bank borrowing criteria .
When true traditional financing cant be achieved then you should consider alternative strategies that are becoming more mainstream everyday. Take a look at the right left side of your balance sheet. Would you prefer to see 500k of receivables there or 500k of cash?
We think we know your answer… and that is achieved by simply financing your receivables as you generate them. The cost of doing that , between 1-3% of a sale ( assuming your customer is a reasonable payer ) can easily be offset by now putting you in a position to take supplier 2% net 10 day type discounts . Additionally you can now purchase goods and services ‘ smarter and harder ‘ with your new found liquidity.
Other external working capital solutions, non bank in nature, include asset bases lines of credit, monetizing your tax credits due your firm, and generating cash via a sale leaseback on some assets.
In summary… it’s a two style challenge, internal and external. If you want some assistance in this regards speak to a trusted, experienced Canadian business financing advisor who can help you on both challenges. Cash flow, not an area that allows you to make mistakes!