And from the external perspective it's about assessing solutions, but more importantly, solutions that work. It's those inflows and outflows that count. Probably the simple way to look at it is simply knowing your operating costs, while at the same time collecting sales, i.e. your A/R, efficiently as possible.
When clients tell us they have made mistakes in their decision to finance working capital we can almost guess what happened. They have mis-matched funds, meaning that cash flow and working capital from operations may in fact have been used to pay for fixed assets.
It's easier said than done, but the ' normal ' way to finance your business is short term lines of credit, typically through your bank. But credit and financing is difficult for small and medium sized firms that can't meet all the criteria required by a chartered bank.
One solid option is injecting what we can call permanent working capital into the business. In effect it's a cash flow loan, payable in fixed monthly installments. This type of transaction is typically available through Canada's government owned business bank, and you have to have a solid proof of historical cash flow to show you can repay the term loan, which is typically unsecured!
We spoke of matching funds, properly. That's important. So if you are considering asset purchases utilize lease financing, minimizing your cash outflow of course, and allowing your company to structure a long term lease payment that matches the useful life of the asset you're purchasing.
Smaller and medium sized business, mostly smaller, tend to mix the personal finances of the owner with the business. That has positive and negative effects. In the last few years the merchant cash advance loan has become popular for many smaller businesses, retail in particular. It allows you to monetize, or ' cash flow ' today, future sales.
When address the need to finance working capital it's recommended you have a handle on the assessment tools. It's not as complicated as you might think. Calculate your days sales outstanding, as well as a similar calculation for inventory. Those two calcs will show the total time it takes for a dollar to flow through your company. You have to bridge that gap now with cash flow financing.
General rules of thumb indicated that you need to have 2 dollars of receivables and inventory for one dollar of payables. That's never been our favorite calculation because it simply reflects the build up of those current assets. We're more concerned about turnover,
So how do Canadian firms assess working capital solutions? In many cases it all comes down to two issues, the size of your cash flow need, and your firms overall credit quality. Simply speaking larger firms with solid financials can access bank credit.
Smaller and medium size firms have numerous options, some are short term in nature, and many times they come with a higher cost, but, and its a big but , it allows you generate all the cash flow you need to grow your business .
So what are those solutions? They are receivable financing, inventory financing, purchase order financing, tax credit financing, and asset based lending. Some, or a combination of these solutions will allow you to finance working capital properly and access credit you need to grow and profit.
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