Many business owners also equate growth and profits and cash flow on the same terms, in reality they are all VERY different! To be fair to the Canadian business owner sometimes the factors affecting your working capital cash are external and out of your control, however they still could lead you to insolvency of some sort.
Question - would you as a business owner ever consider your bank operating line of credit (assuming you have one?) as 'dangerous'? More traditional bank lines give you an advance against your receivables and inventory, the two most liquid assets after cash. If you are committed to a bank facility you have a pre set borrowing limit, it's as simple as that. So if your business has good operating performance, is profitable, and you are expanding or growing carefully all that works. So how could a bank facility precipitate a working capital crisis? Simply because if your business either shrinks, or grows too quickly, you are locked into pre set borrowing power. Your receivables and inventory go down, or go up if you're lucky enough to be exploding with growth, but your credit facility is still the same!
We never want to be accused of just reminding your about the crisis, we'd rather provide solutions and techniques to eliminate the working capital crunch.
So let's address some techniques and solutions for cash flow survival. These focus around accounts receivable and inventory. Think about it, if you have A/R and inventory, these amounts are one step away from liquidity. So how do you monetize these assets on an on going basis, whether they going up or down?
In Canada the most logical solutions to restoring your cash flow normalcy are the following - asset based lending, a working capital facility, and combinations of receivable and inventory and purchase order or contract financing.
True asset based lending facilities are typically for larger facilities of several million dollars or more - they have the ability to double, if not triple your access to working capital. How do they do that? Simply because they margin on an ongoing basis all your A/R and inventory at very high margin rates, and the facility grows as those two asset categories grow. They are the 'best bet' for surviving a working capital crunch.
Small and medium size firms should look toward working capital facilities that combine A/R and inventory lending, have no fixed upper limit, but usually come with higher financing and borrowing costs.
Finally, the average business owner and financial manager may not even be aware that contracts and large 'one of' can be financed and inventory financing programs can be implemented on a stand alone basis.