We find that the term, or concept ' cash flow ' is widely misunderstood - having different meanings to different parties.
There are at least 7, if not more, methods in which the term is utilized in a number of areas of finance.
First of all the term is of course just a general term used in finance literature and textbooks relating to investments, etc.
When we see a company financial reports in the press there are often references to cash flow in the financial reports of the firm.
Getting even more specific, there are three parts to any financial statement, the balance sheet, the income statement, and the Cash flow statement. In older times this cash flow statement was called the Sources and Uses statement - simply indicating where a company got the money, and where they spent the money.
Some financial analysts refer to a company's ' funds statement ' and designate the total funds provided by operations as ' cash flow '.
Confused? We're not there yet. Financial managers and business owners use various types of analysis when making long term investments for the company. They use sophisticated financial analysis known as rate of return, payback analysis, and, guess what ' discounted cash flow ' analysis.
When a business owner is planning he will often prepare, and refer to, his ' cash flow ' budgeting.
And finally, business owners and financial mangers refer to; cash flow;
controls as they monitor the flow of funds and the control of those funds inside any company, small or large.
What becomes clear is that ' cash flow ' has become somewhat of a ' catch all ' wording and is somewhat confusing as more often than not it does not reference actual ' cash ' on hand, or evens the flow!!
Most financial people would probably agree the purest form of ' cash flow ' is in fact one of the items we have mentioned above - that is to say its the cash referred to in the company's CASH FLOW STATEMENT - we referred to it as one of the three pillars of any financial statement. The common calculation of this number is the net income of the company, plus the depreciation, which was not an actual cash outlay.
In summary, we have seen that the term cash flow means a lot of different things to different people - Business owners, and financial managers should know what method of cash flow they are utilizing, its uses, and how it will be interpreted by lenders, financial analysts, shareholders, etc.
And yes, you are forgiven for misunderstanding the term!
Our blog highlights Canadian Business Financing solutions via receivable finance , equipment finance, working capital financing, asset based lending, business acquisition financing,franchise finance, and tax credit monetization via SRED and Film Tax Credits. Our goal is to educate and assist Canadian businesses with their financing needs. You Are Looking For Canadian Business Financing! Welcome to 7 Park Avenue Financial Call Now ! - Direct Line - 416 319 5769
Wednesday, February 24, 2010
Why is everyone talking about Factoring and Accounts Receivable Financing in Canadian Business Circles?
There continues to be a fair amount of press about the alternative financing method known by a number of different names – These include Factoring, Working Capital Financing, Cash Flow Financing, Invoice Discounting, etc!! Let’s keep it simple and we’ll just call it factoring for our purposes.
The old cliché that the ‘cheques is in the mail ‘probably has never run more true for Canadian business owners and financial managers. Receivables, on balance, tend to be in most cases either the largest (or pretty close to it) liquid asset of the company, next to cash. And there is never enough cash.
As the economic challenges of 2008-2009 massively affected business credit liquidity all over the world, including here in Canada the other cliché of ‘cash is king’ became even more important. Many business owners we talk to continually say they are devoting too much time to collection of receivables and their working capital issues, rather than focusing on running and growing their business.
We should mention that as Canadian business owner’s work on liquidating their receivables into that much needed cash that it is, many times, the larger corporations that are paying them as slowly as their smaller customers. Larger corporations by delaying payables can increase their own cash flow rations significantly, and the smaller customer or supplier, your firm, has little leverage with such large corporations. (We won’t name any names to protect the innocent!)
Standard payment terms for most industries, more often than not, is 30 days, but it is of course not unusual for suppliers to stretch out to 60 and sometimes even 90 days.
So where does factoring come in. It certainly can be a consideration for Canadian business owners, as it alleviates the problems we have mentioned above – namely high investment in current assets of receivables and inventory, and prolonged delays of payment from even the largest customers.
The ‘factor ‘ purchases the account receivable, withholds a fee for doing that, and advances cash immediately, almost the same day, against those invoices .
Factoring has been around over a hundred years or more, and has gained huge acceptance in Europe and the U.S. – It certainly never caught on in the past to the same degree in Canada as it has in other places. Some analysts estimate that in the U.S. it’s a 100 Billion dollar business, and in Canada it’s a 4 Billion dollar business.
So let’s get back to our core theme – why is everyone talking about Factoring. Again, it’s the instability of the financial markets and the difficulties that smaller and medium sized firms have in arranging ‘adequate’ business financing. We emphasize adequate because yes, it is great to get a line of credit at your bank of say $ 100,000 at current Canadian rates of 5 or 6 per cent per annum, but if you need 300,000.00 and all your collateral is tied up what good does that do – not a lot.
We believe factoring has done when primarily because of the tightening of chartered banks – Business owners go where the money goes, so alternative non traditional financing such as factoring will continue to do well when banks tighten credit facilities
As Canadian business optimism improves, but credit remarkets remain unstable to a certain degree factoring continues to be a solid viable solution. If your firm has assets such as receivables and in some cases inventory or purchase orders the Canadian business owner can obtain immediate cash for those assets. Most of these firms would not qualify for larger term oriented loans with various financial requirements such as other collateral, debt covenants, operating covenants, etc.
Depending on which type of factor facility the Canadian business owner chooses the facility can also reduce his collection and administrative work.
The best candidate for a factoring facility is a high growth firm with good gross margins. That profile is very important. Why is that? It’s because factoring is more expensive than bank financing, so the firm gets all the cash it needs, but margins are eroded by a couple per cent age points. A low margin, commodity type business is not optimal for a factoring solution...
In Canada, as we have noted, factoring is still not widely accepted, in the U.S. it is dominated by a couple of huge players and probably a thousand smaller firms.
In summary, factoring continue to gain traction in the Canadian business financing marketplace. It is more expensive than bank financing, but provides a lot of liquidity that could otherwise not be found. Business owners need to thoroughly investigate this type of financing if they feel it’s appropriate, or engage the services of a trusted financing advisor in this area with credibility and solid partner firms in this area.
The old cliché that the ‘cheques is in the mail ‘probably has never run more true for Canadian business owners and financial managers. Receivables, on balance, tend to be in most cases either the largest (or pretty close to it) liquid asset of the company, next to cash. And there is never enough cash.
As the economic challenges of 2008-2009 massively affected business credit liquidity all over the world, including here in Canada the other cliché of ‘cash is king’ became even more important. Many business owners we talk to continually say they are devoting too much time to collection of receivables and their working capital issues, rather than focusing on running and growing their business.
We should mention that as Canadian business owner’s work on liquidating their receivables into that much needed cash that it is, many times, the larger corporations that are paying them as slowly as their smaller customers. Larger corporations by delaying payables can increase their own cash flow rations significantly, and the smaller customer or supplier, your firm, has little leverage with such large corporations. (We won’t name any names to protect the innocent!)
Standard payment terms for most industries, more often than not, is 30 days, but it is of course not unusual for suppliers to stretch out to 60 and sometimes even 90 days.
So where does factoring come in. It certainly can be a consideration for Canadian business owners, as it alleviates the problems we have mentioned above – namely high investment in current assets of receivables and inventory, and prolonged delays of payment from even the largest customers.
The ‘factor ‘ purchases the account receivable, withholds a fee for doing that, and advances cash immediately, almost the same day, against those invoices .
Factoring has been around over a hundred years or more, and has gained huge acceptance in Europe and the U.S. – It certainly never caught on in the past to the same degree in Canada as it has in other places. Some analysts estimate that in the U.S. it’s a 100 Billion dollar business, and in Canada it’s a 4 Billion dollar business.
So let’s get back to our core theme – why is everyone talking about Factoring. Again, it’s the instability of the financial markets and the difficulties that smaller and medium sized firms have in arranging ‘adequate’ business financing. We emphasize adequate because yes, it is great to get a line of credit at your bank of say $ 100,000 at current Canadian rates of 5 or 6 per cent per annum, but if you need 300,000.00 and all your collateral is tied up what good does that do – not a lot.
We believe factoring has done when primarily because of the tightening of chartered banks – Business owners go where the money goes, so alternative non traditional financing such as factoring will continue to do well when banks tighten credit facilities
As Canadian business optimism improves, but credit remarkets remain unstable to a certain degree factoring continues to be a solid viable solution. If your firm has assets such as receivables and in some cases inventory or purchase orders the Canadian business owner can obtain immediate cash for those assets. Most of these firms would not qualify for larger term oriented loans with various financial requirements such as other collateral, debt covenants, operating covenants, etc.
Depending on which type of factor facility the Canadian business owner chooses the facility can also reduce his collection and administrative work.
The best candidate for a factoring facility is a high growth firm with good gross margins. That profile is very important. Why is that? It’s because factoring is more expensive than bank financing, so the firm gets all the cash it needs, but margins are eroded by a couple per cent age points. A low margin, commodity type business is not optimal for a factoring solution...
In Canada, as we have noted, factoring is still not widely accepted, in the U.S. it is dominated by a couple of huge players and probably a thousand smaller firms.
In summary, factoring continue to gain traction in the Canadian business financing marketplace. It is more expensive than bank financing, but provides a lot of liquidity that could otherwise not be found. Business owners need to thoroughly investigate this type of financing if they feel it’s appropriate, or engage the services of a trusted financing advisor in this area with credibility and solid partner firms in this area.
Tuesday, February 23, 2010
Business Banking in Canada - An overview
Banking and business borrowing in Canada is significantly different than in the United States. That is primarily driven by the fact that our banking system is uniquely different. In the U.S., borrowing finance is driven through various entities - which include major ' money center banks ', Commercial banks, community banks, and what are know as S&L's, ( savings and loans ). In addition the American landscape is populated by community banks.
The Canadian banking system is different, in that the country has chosen to adopt a more smaller ( by competitor ) banking system that is extremely concentrated and dominated by a handful of major players. Primarily these are:
* RBC ROYAL BANK,
* TD CANADA TRUST,
* CIBC
* BANK OF NOVA SCOTIA,
* BMO BANK OF MONTREAL,
* LAURENTIAN
* NATIONAL BANK OF CANADA
All of these banks support the Canadian Small Business Financing program sponsored by the federal government.
There is a decent sized credit union movement in Canada, and many of these credit unions are making forays into Commercial banking and financing. Many people tend to feel these credit unions have not yet accumulated either the talent or the capital pool to properly play in business banking and commercial lending.
We would point out that some time ago now the government introduced legislation to allow foreign banks to lend in Canada. These banks are known technically as ' SCHEDULE B ' banks, and are referred to a briefcase bankers in that they do not have the large branch networks that are the domain of our BIG 7 banks as listed above.
Capital for Canadian firms is traditionally much harder to secure in the Canadian banking system. Outside of the aforementioned CSBFL program that is federally underwritten the banks tend to secure small business loans with usually up to 100% of personal collateral. That of course has the customers pledging personal assets, savings, etc. There certainly are no ' templates ' for fast quick borrowing in the Canadian small business banking. Loan criteria is judiciously adjudicated by underwriters on a case by case basis, and as has been noted, relies heavily on the traditional three C's of credit -
- character
- capacity
- capital
As the Canadian banks have emerged from the current world economic crisis they do however seem to be placing more focus on smaller firms. For example new divisions for small business banking are being created within some players, seminars and trade shows are being offered, and they often sponsor local events.
Larger firms who in many cases do not meet the requirements of the Canadian banks when it comes to significant borrowing requirements are often forced to consider asset based lending arrangements with Canadian and U.S. commercial finance companies who have stepped in to play a role in this vital area.Even though the larger firms may in fact have been in business a number of years their balance sheets and income statements do not meet the borrowing requirements of the Canadian loan committees. During the 2009 world economic crisis and financial meltdown the Canadian banks were consistently lauded for being some of the best run in the world. However, the downside of this is that ' best run ' in many cases means risk averse and commercial borrowing in Canada is significantly more difficult than in other countries such as the U.S.
The Canadian banks have distinguished themselves by developing software and technologies that have put them at the forefront of commercial borrowing/lending.
In summary, the Canadian banking system is uniquely structured and Canadian business, both larger and small,should focus on the unique strengths of the system borrowing and banking needs. Not all companies will be successful and business owners should ensure their financial executives or advisors know who can best meet their borrowing needs.
Monday, February 22, 2010
Business Loans & Working Capital Financing Options for New or Smaller Canadian Companies
Canadian chartered banks, usually by virtue of their ‘relationship’ with business owners and entrepreneurs are in a position to pass on valuable financing tips and information on business loans and working capital for start up or smaller firms. Although the banks are a solid source of such information the banks themselves, by virtue of their charters and credit policies, are unable to directly satisfy the financing needs of the customer.
Business owners are often therefore encouraged by banks to ‘self finance ‘the venture via equity or owner capital and commitment. It is clearly a misconception that banks play a key and major role in the financing of new ventures. Possibly the only exception to this statement is the fact that the banks offer up, in their role as administrators, the Government Small Business Loan, which is a Canadian federal government program providing loans up to , in some cases 500,000.00$ for purchase of real estate, business assets, or leasehold improvements . (The more typical loan amount maximum is 350,000.00$)
We may or may not agree with Canadian banking policies on start up and young venture financing, we should however appreciate the banks stance – they are lending out our capital at very low rates, with potential to lose the entire investment if your firm can’t repay loans and financing.
How can the small or newer business succeed in financing options? Businesses of the size that we are discussing need thousands, literally millions of dollars of financing to fuel their growth in Canada. In our commentary that we are providing it is important to note that as companies develop along the ‘stage of development ‘timeline they of course have much more access to traditional bank and private equity financing. We are primarily talking about earlier stage companies, who may be still developing products and services and may not be yet profitable as they start delivering and billing for those products and services .
So what are the immediate challenges of firms that are unable to provide traditional financing and what are, more importantly, some immediate solutions?!
The challenges tend to be painfully obvious to the Canadian business owner or financial manager that has worked to get traditional bank and equity financing. They are as follows:
Perceived industry or product risk
No collateral
Uncertain financial projections
Limited Performance history
How can the Canadian business entrepreneur overcome these very traditional roadblocks and challenges? There are a number of ways.
First of all, all alternative methods of financing should be pursuing. Alternative financing methods are most non dependent on the above noted risks and challenges. Those alternative methods of financing might include:
*Business Angels or strategic partners (think suppliers!) for short term arrangements
*Equipment Lease financing
* Sale leasebacks on equipment already purchased and paid for
*Asset based lending arrangements that provide working capital facilities against initial receivables, inventory, and purchase orders (These facilities don’t have the same requirements as banks)
* Sr Ed Tax Credits – Customer who have filed claims can finance those claims for cash
* Invoice / Receivable Financing – Immediate cash for your firm’s receivables (these facilities can be of any size)
In summary, newer or smaller firms fall into the ‘ void ‘ area of financing, where very few traditional financing strategies can be implemented, at a time when cash flow and working capital are most critical .
Business owners should review non alternative strategies which can be of great assistance in early growth periods.
Business owners are often therefore encouraged by banks to ‘self finance ‘the venture via equity or owner capital and commitment. It is clearly a misconception that banks play a key and major role in the financing of new ventures. Possibly the only exception to this statement is the fact that the banks offer up, in their role as administrators, the Government Small Business Loan, which is a Canadian federal government program providing loans up to , in some cases 500,000.00$ for purchase of real estate, business assets, or leasehold improvements . (The more typical loan amount maximum is 350,000.00$)
We may or may not agree with Canadian banking policies on start up and young venture financing, we should however appreciate the banks stance – they are lending out our capital at very low rates, with potential to lose the entire investment if your firm can’t repay loans and financing.
How can the small or newer business succeed in financing options? Businesses of the size that we are discussing need thousands, literally millions of dollars of financing to fuel their growth in Canada. In our commentary that we are providing it is important to note that as companies develop along the ‘stage of development ‘timeline they of course have much more access to traditional bank and private equity financing. We are primarily talking about earlier stage companies, who may be still developing products and services and may not be yet profitable as they start delivering and billing for those products and services .
So what are the immediate challenges of firms that are unable to provide traditional financing and what are, more importantly, some immediate solutions?!
The challenges tend to be painfully obvious to the Canadian business owner or financial manager that has worked to get traditional bank and equity financing. They are as follows:
Perceived industry or product risk
No collateral
Uncertain financial projections
Limited Performance history
How can the Canadian business entrepreneur overcome these very traditional roadblocks and challenges? There are a number of ways.
First of all, all alternative methods of financing should be pursuing. Alternative financing methods are most non dependent on the above noted risks and challenges. Those alternative methods of financing might include:
*Business Angels or strategic partners (think suppliers!) for short term arrangements
*Equipment Lease financing
* Sale leasebacks on equipment already purchased and paid for
*Asset based lending arrangements that provide working capital facilities against initial receivables, inventory, and purchase orders (These facilities don’t have the same requirements as banks)
* Sr Ed Tax Credits – Customer who have filed claims can finance those claims for cash
* Invoice / Receivable Financing – Immediate cash for your firm’s receivables (these facilities can be of any size)
In summary, newer or smaller firms fall into the ‘ void ‘ area of financing, where very few traditional financing strategies can be implemented, at a time when cash flow and working capital are most critical .
Business owners should review non alternative strategies which can be of great assistance in early growth periods.
Thursday, February 18, 2010
Canadian Business Financing /Business Loans in the 2010 Economic Environment and Me
Despite a lot of pessimism out there many Canadian Business owners are still fairly optimistic about the business environment as we forge into 2010... Small business and middle market type firms in Canada clearly face the largest challenges for business financing – the larger firms; a la Financial Post 100 etc seem to be doing quite well, thank you.
The theme of last year can certainly be summed up in one word, and that’s survival. It clearly was a year of business and financing crisis and challenge for many firms. Business owners in the SME ( Small and Medium Enterprise ) market can clearly feel that if they made it through the 2008-2009 timeframe that they should be ok this year ; paraphrased I guess that means ‘ it cant get any worse ‘! What terrible economic times do for many businesses is to make them tougher, leaner and smarter.
A favorite expression of ours is that revenues and good times can mask a lot of flaws. When those revenues and profits and good times in previous years ended last year many firms saw real weakness in various financial and operational parts of their companies. That forced much business to adopt new strategies to address those financial and operational issues.
We have heard of the expression (I think it’s an old blues song?) that ‘I have been done so long everything looks up to me ‘! Most Canadian businesses are seeing sales grow again, some in fact significantly.
So is it all good news. Not really of course, a lot of the challenges are still there. Many a business owner can be forgiven, given what we went through in 2008-2009 for doubting their commitment and their skills in their business.
What continually amazes many readers is the fact that the SME engine is in fact the growth engine of the economy for business and employment. God knows they aren’t hiring at GM and Toyota we would think!
We keep reading about the entire stimulus that the federal government has put into the Canadian economy. I am assuming its there , but most business owners, like myself , certainly cant name one direct benefit of that stimulus , particularly in the area of business financing, business loans, operating lines of credit, etc.
While in fact the revenues and profits are starting to climb a bit lack of solid business financing is still a huge challenge for Canadian business owners. While the business owners and financial managers rely heavily on their ability to access financing naturally the challenges can sometimes be approached at the other end – i.e. operating more efficiently! Yet entrepreneurs being entrepreneurs, business owners should would like to market more, take on new product lines, and buy equipment to grow their business.
Cash flow is clearly one of the largest challenges for Canadian business. Financial reserves have dwindled, assets have been re mortgaged, and alternative financing has been sought. Most businesses, quite frankly, opted to reduce headcount and cut back expenses, thinking that a trip to the bank would not be successful.
Are Canadian businesses more optimistic this year, we think so? Are the challenges still there? We know so!
The theme of last year can certainly be summed up in one word, and that’s survival. It clearly was a year of business and financing crisis and challenge for many firms. Business owners in the SME ( Small and Medium Enterprise ) market can clearly feel that if they made it through the 2008-2009 timeframe that they should be ok this year ; paraphrased I guess that means ‘ it cant get any worse ‘! What terrible economic times do for many businesses is to make them tougher, leaner and smarter.
A favorite expression of ours is that revenues and good times can mask a lot of flaws. When those revenues and profits and good times in previous years ended last year many firms saw real weakness in various financial and operational parts of their companies. That forced much business to adopt new strategies to address those financial and operational issues.
We have heard of the expression (I think it’s an old blues song?) that ‘I have been done so long everything looks up to me ‘! Most Canadian businesses are seeing sales grow again, some in fact significantly.
So is it all good news. Not really of course, a lot of the challenges are still there. Many a business owner can be forgiven, given what we went through in 2008-2009 for doubting their commitment and their skills in their business.
What continually amazes many readers is the fact that the SME engine is in fact the growth engine of the economy for business and employment. God knows they aren’t hiring at GM and Toyota we would think!
We keep reading about the entire stimulus that the federal government has put into the Canadian economy. I am assuming its there , but most business owners, like myself , certainly cant name one direct benefit of that stimulus , particularly in the area of business financing, business loans, operating lines of credit, etc.
While in fact the revenues and profits are starting to climb a bit lack of solid business financing is still a huge challenge for Canadian business owners. While the business owners and financial managers rely heavily on their ability to access financing naturally the challenges can sometimes be approached at the other end – i.e. operating more efficiently! Yet entrepreneurs being entrepreneurs, business owners should would like to market more, take on new product lines, and buy equipment to grow their business.
Cash flow is clearly one of the largest challenges for Canadian business. Financial reserves have dwindled, assets have been re mortgaged, and alternative financing has been sought. Most businesses, quite frankly, opted to reduce headcount and cut back expenses, thinking that a trip to the bank would not be successful.
Are Canadian businesses more optimistic this year, we think so? Are the challenges still there? We know so!
Tuesday, February 16, 2010
The Big Squeeze - and Me
Front page of Globe and Mail today - Headline = ' SMALL COMPANIES / BIG SQUEEZE '
The article highlights the fact that the recession ended, but not the Small Business Credit Crunch !
The article, by Joanna Slater, talks about even ' the healthiest' of small firms not being able to get business financing .
The article has the usual info that we all know of course, that small and medium sized business is the employment engine of the economy - also highlights a new OBAMA fund of 30 Billion to help fund small business .
Naturally as the small and medium sized firms struggle to get a couple hundred thousand dollars
of credit line the Kraft Foods of the world are floating 9 Billion Dollar bond deals to buy their competitors . The big get .. bigger ..
The article is dead on in saying that as bank health is in the spotlight that small business feels it worst - One business owner is quoted in the article saying ' Based on what I have heard I haven't even bothered to go into a bank ' ..
Can we all agree Canada is in the same position - Lets let good small and medium sized firms in Canada get the financing they need !
Stan
The article highlights the fact that the recession ended, but not the Small Business Credit Crunch !
The article, by Joanna Slater, talks about even ' the healthiest' of small firms not being able to get business financing .
The article has the usual info that we all know of course, that small and medium sized business is the employment engine of the economy - also highlights a new OBAMA fund of 30 Billion to help fund small business .
Naturally as the small and medium sized firms struggle to get a couple hundred thousand dollars
of credit line the Kraft Foods of the world are floating 9 Billion Dollar bond deals to buy their competitors . The big get .. bigger ..
The article is dead on in saying that as bank health is in the spotlight that small business feels it worst - One business owner is quoted in the article saying ' Based on what I have heard I haven't even bothered to go into a bank ' ..
Can we all agree Canada is in the same position - Lets let good small and medium sized firms in Canada get the financing they need !
Stan
Tuesday, February 9, 2010
The More thing change , the more they stay the same, and me ..
Interesting article today on BNET.COM ; I wish I was creative in my titles - it was ' CIT/JOHN THAIN PLAN ESCAPE ' .
No its not a murder mystery, or a prison escape, but an update on CIT emerging from bankruptcy and hiring John Thain as CEO . Thain ran Bank OF America and was turfed over the Merrill Lynch fiasco .
It never surprises me as to how the cast of charachters never change, they just re-surface and start all over , tarnished reputations and all . We see it everywhere.
Stan
It never surprises me as to how the cast of charachters never change, they just re-surface and start all over , tarnished reputations and all . We see it everywhere.
Stan
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