YOUR COMPANY IS LOOKING FOR WORKING CAPITAL FIXES!
Guide to Boosting Your Business's Working Capital
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Financing & Cash flow are the biggest issues facing businesses today
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South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
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From Cash Crunch to Cash Flow: Transform Your Business with Effective Working Capital Management
Working Capital Strategy? Clients don't believe us at first, but believe it or not when it comes to business cash flow the Canadian business owner /manager has almost as many choices as there are types of apples! Understanding key issues as well as getting the right working capital structure is key. Let's dig in.
INTRODUCTION
Working capital solutions are strategies and business financing solutions that a company can use to manage cash flow while ensuring the business has enough funds to cover day-to-day operations. A business can also focus on asset turnover strategies to optimize cash flows in the business. Whether it is optimizing inventory turnover or focusing on days sales outstanding while managing payables will all help a company secure financing in key areas of its business.
That working capital structure will be the lifeblood of a business and is typically measured by the difference in current assets and current liabilities on the balance sheet. Poor or negative working capital will often lead to financing distress in the business.
WHY IS BUSINESS LIQUIDITY IMPORTANT - 3 ASPECTS OF FAILURE IN A WORKING CAPITAL STRATEGY
Your business liquidity is the company's ability to access cash or convert key current assets such as account receivables and inventory into cash - allowing your business to meet day-to-day obligations. Business owners should monitor key ratios/relationships on the balance sheet and cash flow statement to better understand the financial health of the business - They will signal a company's ability to calculate working capital and address cash flow issues and protect from insolvency.
Does the owner/finance manager really have to be over-worried when it comes to cash flow availability concerns? When you don't address those issues what in fact can happen? Lots actually.!
We're the first to focus on the negative and downside but cash flow unavailability leads to:
Employee issues
Potential downsizing of your business
Inability to grow and expand
MORE CASH FLOW = BEATING THE COMPETITION!
Working capital structure and tools come from your ability to plan, analyze and make the most of using your assets to monetize capital. Doing these sorts of things right often puts you well ahead of competitors, who we can assure you have their own problems!
Stay Ahead of the Game: Essential Working Capital Management Techniques
Those Bay Street folks call it the ' working capital ratio ' - which many lenders look at also. It's simply the relationship of short term assets to current liabilities, and believe us, you want more of the former! It's a short-term measuring stick for your cash flow and ability to pay short-term debt obligations such as leases, loans, suppliers/accounts payable, and employees!
Accounts receivables and inventory management are all about asset turnover, leading to more positive financial ratios that are acceptable to owners/lenders and those holding term debt on your company.
Revolutionize Your Business's Cash Flow with Proven Working Capital Techniques
If there's any good news it’s the fact that growth and asset growth allow you to access more cash flow solutions. But you have got to know how to do that, what amount and type of financing you need, and what the cost of some of those solutions are.
CONVERTING ASSETS INTO CASH
The essence of working capital strategy and structure is knowing the amount of liquidity in your business. One of the greatest ironies of business is that a company can have abundant and significant assets, but if you can't convert those into cash, or monetize them with the right finance solutions ... well... you know the outcome of that.
So it’s the management of your working capital accounts (cash on hand or available, inventory, accounts receivable ) that allows you to stay in ' positive mode '. Oh, and by the way, those payables on the other side of the balance sheet can drastically affect your overall working capital and business cash success. Managing payables to the max in a positive manner affects cash flow from your operations!
THE CASH CONVERSION CYCLE
Business owners in the SME sector quickly realize that your overall cash flow success drastically affects your sales, buying, planning, and asset acquisition. When you think of it all of that essentially becomes your whole ' cash conversion ‘ story - in a term we use often it's really the story of how 1 Dollar flows through your company, from start to finish.
Remember also that your current or future lenders are looking at your cash flow ability all the time. They're evaluating their risk relative to the amount you are borrowing.
SOLUTIONS FOR YOUR WORKING CAPITAL STRATEGY AND STRUCTURE
How can you address the right cash flow structure? Best solutions in a business loan include, but are not limited to:
A/R Financing - Both managing and financing accounts receivable properly will optimize your overall cash flow and working capital - funds from sales can be deposited into the business account the same day a company generates sales from its products or services
Inventory Loans - Inventory turns are key ensuring you are not tying up cash in excess inventories - Companies should focus on supply chain management and just-in-time inventories to ensure cost-effective inventory practices.
Access to Canadian bank credit
Non-bank asset-based lines of credit
SR&ED Tax credit financing - filed claims or even accrued expenses for r&d can be financed in a sr&ed loan to aid in a company's liquidity around their research and development projects
Equipment / fixed asset financing
Short-Term Working Capital Loans / Merchant Cash Advances - A permanent working capital loan or short-term loans such as a merchant cash advance will provide additional business liquidity and help the net working capital position when negative cash flow occurs. A personal guarantee and good credit score of business owners is required for ' MCA's"
Government small business loans and grants are also available for many small business owners, and changes in the program in 2022 added significant borrowing capability to the program.
WHAT FACTORS DETERMINE THE WORKING CAPITAL YOUR BUSINESS NEEDS
Factors determining working capital business needs include -
The business model of your industry
The operating cycle of your business - ie how long does it take for a dollar to flow through the company- it is the timing around outlays of cash required to sell or produce goods and services to the time of receiving payment - every industry will vary
Efficiency and asset turnover in receivables and inventory- Here is an excellent article by Harvard Business Review on internally managing cash
Cash Flow
Business goals of the owner
CONCLUSION - WORKING CAPITAL STRATEGIES TO BUILD A SOLID FOUNDATION FOR YOUR BUSINESS
Business owners know managing and financing working capital properly ensures short-term financial health - By monitoring key liquidity indications in your financial statements, a business can implement best practices of financing and managing working capital around key assets such as receivables, inventories, as well as obligations around account payable.
Working capital loans and other funding solutions will strengthen a company's financial position and help ensure long-term success.
Call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor who can assist you with your working capital structure and needs.
FAQ: FREQUENTLY ASKED QUESTIONS PEOPLE ALSO ASK MORE INFORMATION
What is Cash Working Capital
Working capital is the amount of cash and other current assets a business has available after all its current liabilities are accounted for. Understanding the working capital requirement how much working capital you have on hand to pay bills as they come due is critical to the success of an organization focused on working capital management.
What is the relationship between cash and working capital?
Working capital represents the current assets minus the current liabilities on the company's balance sheet - known as the working capital formula. Current assets include cash and cash equivalents, inventories, and accounts receivable. The cash flow is a flow quantity that is generated by every financial transaction and has an effect on the liquid funds of the company from a goal of positive working capital for business needs and reflecting the importance of working capital.
What are Working Capital Management Best Practices
Effective management by small business owners of working capital involves closely monitoring cash, inventory, accounts receivables, and accounts payables. Optimizing these elements ensures a sufficient level of working capital to fund interest payments, allowing businesses to operate without disruption and allowing for potential business growth. Best practices for working capital management include improving collections procedures, maintaining optimal inventory levels, and negotiating favorable payment terms with suppliers. Additionally, businesses can explore various working capital funding solutions, such as lines of credit, invoice factoring, and trade financing. Cash flow projections will help project related expenses the company may incur.
How Does Managing Accounts Payables Affect Cash
Optimizing accounts payables management and other short-term obligations is a key factor in cash flow from operations - Payable terms can often be negotiated with suppliers and a business can reduce costs by taking advantage of prompt payment discounts.
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