Can Your Business Pass The Stress Test For Present & Future Cash Flow Needs
OVERVIEW – Information on working capital finance needs and solutions in Canada. The right business financing solution and funding for your company depends on understanding your cash flow cycle
Working Capital financing in Canada is all about assessing your current and future business finance solution needs. We hear a lot about ' stress testing ' these days - which seems to us a great analogy for our theme of ensuring your business can withstand the right funding challenges. Let's dig in.
So what about that oft used term ' working capital '? It's used a lot these days and means different things to different people - more often than not simply ' operating liquidity '.
Text books tell us that there is a clear definition of working capital, namely going to your balance sheet and subtracting current liabilities from current assets. That’s a great textbook definition, but let’s visits the real world together on what that means.
In looking at different ' stress tests ' for your business it's all about your daily operating needs, plus of course your ability to reduce your long term obligations that you might have in leases or loans.
The absolute number of dollars in your net working capital as defined by our definition above does not really matter. (Although positive working capital is better than negative working capital!)
So how do you ' stress test ' your business for cash flow needs. It's really all about the turnover and management of your working capital accounts. Those accounts are:
Simple business logic tells us that if your inventory and receivables are turning over properly, and you’re managing your payables (by delaying them to the maximum amount possible per your terms with suppliers) you will be achieving working capital management success, and well on your way to ' stress test' success.
When your business is building up receivables and inventory the pressures on liquidity are increased. That's when the stress comes in!
Your fixes are potentially various - a permanent working capital term loan (larger companies and the big boys call these loans ' sub debt or mezzanine financing). Another positive solution is alternative financing strategies to increase cash flow availability. They include:
A/R Financing / Factoring/ Confidential Receivable Finance
SR&ED Tax Credit Financing
Sale leasebacks on owned assets
Bank Credit lines / Non bank asset based lines of credit (‘ABL Loans')
Those above mentioned solutions are gaining more traction in Canadian business finance everyday!
Many clients tell us that they address some of their working capital needs through use of Business Visa credit cards. This clearly adds additional capital, you are paying for what you use, but in our opinion does a poor job of separating the owners personal credit from the business as these types of cards are closely tied to personal net worth’s and credit scores of the owners.
The other solution in a more traditional sense is to ensure you are using lease financing or sale leaseback financing to minimize cash flow out when you are considering purchases of assets.
Solutions such as this save the business owner from committing additional funds into the business via owner equity which he may not be able to, or not want to do. It certainly isn’t unusual in Canada to see business owners ‘lend ‘their company money in times of need, often with no fixed repayment schedules. However, as we have noted, the better solution is effective turnover of receivables and inventory or accessing alternative working capital solutions that we've mentioned.
In summary, business in Canada always has working capital challenges. Those challenges are diminished when you are focusing on proper turnover of current assets.
If you want to ensure your company is ' stress tested' for proper Canadian business funding needs seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with your capital needs.
7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Office = 905 829 2653
Stan has had a successful career with some of the world’s largest and most successful corporations.
Prior to founding 7 Park Avenue Financial in 2004 his employers over the last 25 years were, ASHLAND OIL, ( 1977-1980) DIGITAL EQUIPMENT CORPORATION, ( 1980-1990) ) CABLE & WIRELESS PLC,( 1991 -1993) ) AND HEWLETT PACKARD ( 1994-2004 ) He is an expert in Canadian Business Financing.
Stan has over 40 years of business and finance executive experience. He has been recognized as a credit/financial executive for three of the largest technology companies in the world; Hewlett-Packard, Digital Equipment and Cable & Wireless. Stan has had in depth, hands on experience in assessing and evaluating thousands of companies that are seeking financing and expansion. He has been instrumental in helping many companies progress through every phase of financing, mergers & acquisitions, sales and marketing and human resources. Stan has worked with startups and public corporations and has many times established the financial wherewithal of organizations before approving millions of dollars of financing facilities and instruments on behalf of his employers.