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Mastering Working Capital, Cash Flow & Business Financing in Canada | 7 Park Avenue Financial

The Canadian Business Owner's Guide to Efficient Financing

Tackle the complexities of business financing head-on by reading this article because it offers vital insights into Canadian working capital and cash flow

The Importance of Keeping the Pump Primed

Business financing in Canada requires that you ensure that the pump is primed! Ignoring the alternatives you have for cash flow and working capital is done at your own peril, especially in today’s ultra-competitive environment. We thought that the priming of the pump is a great expression and a good analogy. Let's dig in.

The Origin of the "Priming the Pump" Phrase

Humorously Donald Trump actually said he invented the phrase! (“Have you heard that expression used before?" Trump continued. "Because I haven't heard it. I mean, I just ... I came up with it a couple of days ago and I thought it was good. It's what you have to do."

But the term is most often associated with 20th-century economist John Maynard Keynes, a giant of the field and a favourite of liberals who favoured government spending.

Key Role of Working Capital and Cash Flow

Access and management of your working capital and cash flow play a key role in business financing and your firm's growth and overall well-being. No one ever argues with us on that one.

Understanding Business Growth Financing

Your ability to get financing on items such as fixed assets, a/r, and inventory will ultimately depend on how successful and how fast your company can grow.

Clients are somewhat amazed when we tell them that we can pinpoint the exact time when they will stop being successful!

What do we mean by that? Simply that you have a great little tool to determine when you need that extra capital in your business. Most small and medium-sized businesses haven't heard of it, but we can assure you that larger more sophisticated corporations have a total handle on this one.

The Sustainable Growth Ratio

So what’s the tool - it's called the Sustainable growth ratio and it's a simple formula that shows you the most your firm can grow without bringing in new capital.

For example, if you want to get a shareholder return on your total capital in the business of 20% you can reinvest all your earnings and keep your relative overall financial position the same. Want to grow faster, and then access more outside capital? Simple as that.

Challenges in Accessing More Capital

However accessing more capital from the viewpoint of our clients is either difficult or undesirable - Most owners don't want to reduce or dilute their ownership interests, etc.

Monetizing Business Financing Assets

The choice? It's simply monetizing your business financing assets such as receivables, inventory and unencumbered assets and creating working capital and cash flow via asset turnover.

You create cash flow financing internally by addressing how you both manage and turnover receivables, inventory, and accounts payable.

Accounts payable you ask?! Yes, simply because as you slow your payables you generate real cash flow progress. Naturally, there is a fine line here between generating that cash and alienating your valued suppliers!

Real World Solutions to Canadian Working Capital Financing

We never want to be accused of talking about the problems and not the solutions, and we mean real-world solutions, not textbook solutions to Canadian working capital financing.

Available Alternatives for Cash Flow Financing

Accounts Receivable Financing
Working Capital Loans / MCA Merchant cash advances
Equipment Leasing
Sale leasebacks
Asset based non-bank line of credit
SR&ED Tax credit financing
Mezzanine financing
Business credit cards
Purchase order financing

Key Takeaways

Working capital is the difference between a company's current assets and current liabilities.

Measures operational efficiency and short-term financial health; ensures the company can fund operations and pay debts.

Cash Flow:

Net amount of cash and cash-equivalents transferred in and out of a business.
Positive operating cash flow indicates increasing liquid assets and financial health; negative cash flow may signal insolvency.

Business Financing:

Ways companies secure funds for business growth, asset acquisition, or covering a company's working capital shortfalls.
Enables businesses to operate, invest in growth, and handle unexpected costs.

Sustainable Growth Ratio:

Formula indicating a firm's growth potential based on current finances without needing extra financing.
Helps businesses gauge growth rates without depending on external funds.

Monetizing Business Financing Assets:

Converting business assets into cash or cash equivalents through sales, financing, etc.
Generates cash quickly, especially when traditional financing is limited.

Conclusion

In summary, we spoke of your desire or inability to attract long term capital to your business, the solution being short-term working capital decisions around how you finance on a day-to-day basis.

Call 7 Park Avenue Financial, a trusted, credible and experienced business financing advisor on how to access the Canadian business financing you need. Today!

FAQ

What are some common proactive steps a company can take to avoid working capital issues and a cash crunch?

Here are some proactive steps to avoid common working capital issues:

Regular Cash Flow Forecasting and review of the cash flow statement

Efficient Inventory Management:

Speed up Receivables:

Extend Payables without Straining Relationships:

Maintain a Reserve:

Reduce Unnecessary Expenses:

Manage Debt on the balance sheet:

Monitor Key Financial Ratios:

Diversify Customer Base:

Implement Efficient Systems:

Review Pricing Strategies:

Negotiate Bulk Discounts:

Regularly Review Financial Statements:

Consider Seasonal Needs:

Why is cash flow so crucial for a business?

Positive cash flow indicates increasing liquid assets, enabling a company to invest, settle debts, and handle unforeseen expenses.

How does business financing benefit my company?

It offers funds to grow your business, buy essential assets, and manage unexpected financial shortfalls.

What is the Sustainable Growth Ratio?

A formula showcasing a firm's growth potential based on its current financial stance without additional financing.

Why should I consider monetizing business financing assets?

It’s a swift way to generate cash, especially when facing challenges in accessing traditional financing.

What are some common sources of business financing in Canada?

Apart from working capital, businesses often explore options like bank loans, venture capital, angel investors, and government grants that can aid in achieving positive working capital.

Are there risks involved with relying too much on external financing?

Yes, over-reliance can lead to significant debt for many businesses, potential loss of equity, or increased financial strain during economic downturns.

How can I improve my business's cash flow?

Strategies to avoid negative working capital scenarios include timely invoicing, efficient inventory management, renegotiating contracts, and exploring quick financing solutions like factoring as a working capital loan solution

What are the differences between equity financing and debt financing?

Equity financing for small business owners involves selling shares of your company to raise funds, while debt financing is borrowing money to be repaid with interest.

Is it advisable for startups to dive deep into external financing?

Startups should weigh the pros and cons. While external financing can fuel growth, it might also entail loss of control or high-interest repayments that don't withstand financial challenges

Click here for the business finance track record of 7 Park Avenue Financial

Tuesday, October 24, 2023

Business Financing Alternatives In Canada : Ignore Cash Flow & Working Capital At Your Own Peril!