But not so fast say our clients. Have you ever tried to write a payroll cheque with a ' definition '! The hard reality is that you need to understand how to convert those short term ' current assets ' into cash flow either on an operation basis, or a borrowing basis. It's those two strategies that allow you to meet obligations with real money!
And what are those assets in question - we're pretty sure you know them already, but to recap its receivables and inventory. Those two assets, more often than not, and how you address them, are they key to financial health. Remember also that you ability to again, manage, and borrow on those two asses allows you to grow your business.
A shortage of working capital tends to be a huge red flag when it comes to your bankers, lenders, and lessors, potentially signaling the end to your business. The irony is that in many cases we say sales are actually still growing in those circumstances, so the business owner doesn't realize that the large investment in A/R and inventory is actually crippling working capital and cash flow success.
So, how can you increase your capital in both traditional and non traditional ways? If you are an established Canadian company the qualifications for bank financing of receivables and inventory are pretty clear - a growing viable company, a clean balance sheet, profits, and collateral and credit worthiness of the owners. Medium sized to larger firms can avail themselves of more ' esoteric' forms of working capital and commercial finance solutions such as unsecured cash flow loans and securitization facilities.
But hey, what about the start up or very new firm? Don't despair, because even though financing options are a bit more limited, and sometimes more expensive, traditional and non traditional solutions in commercial finance also work. Those might include the government based unsecured working capital term loan, receivable financing , or a working capital facility based on margining your receivables and inventory . This type of facility is typically called in the industry an ABL, or ' asset based ' line of credit. They work and they are great, depending on your circumstances. If your firm does R&D you can even cash flow or monetize your R&D tax credits.
We have spoken about external facilities to access, both traditional and non traditional. But remember also that the solution may lie within. Our friends over at the textbook place define your working capital ratio as being hopefully at least 1:1.
If in fact your ratio is much higher than two you're in the best and worst of situations. you have lots of working capital ( on paper ) but short term assets are tied up in a/r and inventory which is not turning over enough . So look within also and focus on collections and inventory turnover . If you ever walk into a Financial Post 100 firm you shouldn't be surprised that large corporations have large, sometimes very large headcount allocated to receivables and inventory management. That's why they are successful in working capital commercial finance.
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