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Mastering Working Capital Finance: Financing Cash Flow Solutions
Financing & Cash flow are the biggest issues facing businesses today
Unaware / Dissatisfied with your financing options?
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Boost Your Business's Cash Flow with Smart Working Capital Finance Tactics
Clear answers... no, even better, clear real-world solutions. That’s what Canadian business is looking for in working capital finance. And that type of financing and cash flow solution has been tough to come by over the last several years.
INTRODUCTION
Working capital finance solutions are necessary for the money a business needs to fund day-to-day operations. It typically covers business expenses such as wages, rents, inventory purchases, and variable expenses.
Small and large companies need effective working capital finance
Let's dig in on key issues the business owner needs to know -
What is working capital finance and what is it made up of
What are financing options from traditional financial institutions such as banks
What alternative finance options are available for companies not able to access traditional financing
What is effective working capital management and what best practices should a business use
How can a business choose the right financing options based on cash flow forecast business needs
WHAT IS THE DIFFERENCE BETWEEN CASH FLOW AND WORKING CAPITAL?
Cash flow is in effect a summary of the cash holdings of the business and indicates the inflows and outflows of cash over time - Companies with good income and profit with good asset turnover will have positive cash flow. The ' cash flow statement ' that is part of a business financial statement will show how much cash was used during the year and will reflect overall liquidity. Operating cash flow and cash flow from financing activities are also key parts of those financial statements.
Working capital is a measurement of the relationship of the difference between current assets and current liabilities on the balance sheet - It can be positive and a company can also have negative working capital - If the current assets of the business are higher than the current liabilities working capital is positive.
WHAT ARE THE COMPONENTS OF WORKING CAPTIAL?
Let’s examine why your understanding of working capital and your ability to measure the need and the solution is as critical as ever in the competitive environment you fight every day.
Current assets on balance sheets are those assets convertible into cash within a year - Most common assets include accounts receivable and inventory. Current liabilities such as accounts payable are obligations the company has that are payable within the current year.
Payables, Receivables and Inventory are the main components of the working capital.
Efficient Cash Flow Management Via Working Capital Finance
Let's focus on some of the hard facts first. If you don’t have working capital key issues such as payrolls, loan and lease payments, inventory purchases, etc. can become big issues pretty quickly!
So how can you change assets and sales into the financing of cash flow? It's a one-word answer - monetization! You need to use a razor-sharp focus on monetizing (i.e. changing!) receivables, inventory, and sales into working capital to address those key issues we just mentioned above.
The better you do this you will find the better the patient's health will be and that patient is of course your company.
Canadian business owners and financial managers know that their balance sheets and income statement are related. Today we're focusing mostly on the balance sheet - The amount and relationships between those current assets such as accounts receivables, inventory, and payables can let you zero in real quickly on what some of the problems might be. (We won't forget to tell you about those solutions also!).
Working Capital Mastery: The Solution for Financing Cash Flow
Yes, you do need positive working capital to 'stay healthy' from a working capital and cash flow perspective. And talk about a balancing act, if you are growing too quickly your investment in A/R and inventory hinders cash flow, and if sales are shrinking then your receivables shrinks also.
So, we've done the usual pretty good job (we think) of telling you what your problems are. But that’s not why you came here, right? Let’s address solutions.
Are there in fact real solutions that allow you to fix today’s financing of cash flow challenges, and at the same time address these issues in a long-term manner? Here's the good news. There are!
TRADITIONAL FINANCE OPTIONS
Traditional financing options for working capital include:
Bank loans,
Business lines of credit
Business credit cards
Bank loans are typically long-term in nature with longer amortizations and they are repaid over a period of years. Lines of credit are short-term financing solutions that are used to cover short-term cash flow needs. Credit cards are another option for financing cash flow, but they typically come with high-interest rates and are often used for incidental emergency purchases.
ALTERNATIVE FINANCING OPTIONS
Alternative financing options for funding cash flow include:
Supply chain finance
Asset-based non-bank line of credit
Short Term working capital loans/merchant cash advances
Almost all of these solutions are non-bank independent finance company solutions! We bet you did not know that.
All of these solutions have different levels of criteria for approval and success. Some are size-based, and some are viewed as alternatives, but boy do they work! Pricing is a factor also, and each of those solutions brings a different level of financing cost to the table.
WHAT ARE BEST PRACTICES FOR EFFECTING WORKING CAPITAL FINANCE MANAGEMENT
Good asset turnover is key to effective cash management - Inventory turnover, and a focus on days sales outstanding are solid methods of optimizing cash flows.
Common pitfalls to avoid include overtrading ( expanding too quickly ) poor management of inventories, and lack of a credit and collection policy. All of these can lead to a situation where it is difficult for a company to meet business obligations.
KEY TAKEAWAYS
Working Capital relates to money a business needs for financing day-to-day business operations
A/R, Inventory and payables are key components of working capital
A business can access short-term working capital or permanent working capital
CONCLUSION
Effective cash management practices are key for all businesses. Understanding what makes up working capital and the business financing options available allows a company to be well-informed about cash flow management strategies.
Regularly review the business working capital finance situation and adjuting to ensure adequate fund area available allows a business to operate in a smooth manner, Talk to the 7 Park Avenue Financial team to help address issues and solutions to cash flow needs.
Businesses that are proactive in focusing on healthy finances will always have a solid advantage over the competition as they achieve financial stability and a focus on long-term business success.
If you want to investigate any of our proposed solutions to both immediately and from a long-term perspective fix your financing and cash flow issues call 7 Park Avenue Financial, a trusted, credible and experienced business financing advisor. Those cash flow working capital solutions are just around the corner.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
What Are The Types of Working Capital Finance
There are two types of working capital finance: permanent working capital and temporary working capital. Permanent working capital is the minimum amount of working capital that a company needs to operate on a day-to-day basis and meet financial obligations via the company's liquidity. Temporary working capital is the company's working capital required to finance its seasonal or cyclical activities and maintain a company's financial health around the company's ability to succeed and grow.
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