Business cash flow. It’s the reason that thousands of Canadian businesses, everyday, must feel like they have a combined feeling of ‘ going broke ‘ while seeing their sales rise at the same time.
It’s very wrong of course to assume that profits out of those sales assumes positive working capital equals profits. That is absolutely not the case.
Yes, over the long run those profits will become cash, but what about the gap? Thats that lag in between that is giving our business owners that ‘ broke ‘ feeling!
Business cash flow is in fact the ‘ lubricant ‘ that keeps your company running. You get that working capital from two sources, internally, i.e. how you run your company and manage your current assets, and externally, via commercial lending facilities. We suppose that you could also sell assets to generate cash, but thats not really why businesses go into business, right?!
Your company balance sheet changes everyday, At the same time though its important to regularly take a look at that balance sheet as a measurement of your ability to run your company . Simply speaking its a way of both you as owner or manager, or any of your lenders for example, to determine if you’re solvent and able to meet your commitments.
Borrowing properly and putting cash flow to good use is of course your goal for a successful business operation its about borrowing the right way, from the right parties, in a manner that ensures you are not in a liquidity trap that so many business owners and financial managers find themselves in.
One key way you can borrow successfully is to match short term debt with the right assets. A great example of this is a business line of credit or receivable finance and inventory finance facility. In this manner you’re taking current assets and ensuring they are supported with a solid short term debt solution. When it comes to financing long term assets you should not be doing that by collateralizing your current assets. It’s all about the matching!
Let’s use a quick example of where things can go wrong… it comes back to that ‘ business is great’ but why do we feel like we’re going under’ feeling! Let’s say a company had a significant receivable base and put in a business line of credit facility. A need perhaps develops for some new assets to support the growth of the business so part of the line of credit funds are used to finance equipment assets.
Where things go awry is when sales go down or flat , funds are used to reduce payables or temporary operating losses, and the company finds themselves ‘ over advanced ‘ . This is right about the time when creditors get worried, both suppliers and your lenders. Bottom line, its a perfect storm of cash flow ugliness.
To avoid that ‘ broke feeling’ its a question of matching debt properly and using cash flow via solutions such as leasing or term loans for asset acquisition.
Numerous short and long term solutions are available to the Canadian business owner when it comes to business cash flow solutions. Short term liquidity comes from bank lines; receivable financing facilities asset based lending lines of credit, and monetization of tax credits.
Speak to at trusted, credible and experienced Canadian business financing advisor who can assist you in being successful… not going broke!