What If .. Your Company Had All the Working Capital Financing You Needed?

Most Canadian business owners and financial managers cannot even imagine the concept of having enough working capital all the time, and never having to regularly face that cash flow challenge that many times consumes the time of owners and management.

Part of your success in attaining the right amount of working capital understands what it is and what it is not. The most applicable way we encourage clients to understand the term is simply the funding needed to manage your daily business operations. So in general it is 'short term 'in nature, although business owners can readily be excused for wondering why it is 'short term' if they are thinking about it all the time!

As we have stated, you have to understand what the problem is before you can address it, and address it properly .So focus on the concept of thinking of working capital as your ability to finance your investments in receivables and inventories, and in a small number of cases ' marketable securities .

The concept of a 'cycle 'is very important in understanding the cash flow conundrum and the solutions around that conundrum. Think of your current assets as changing daily, they are revolving and reverting back to their original state, i.e. Cash becomes inventory which becomes a receivable which becomes cash again... that's the concept.

You will be in a better position to understand the working capital needs, and how to address them if you understand the length of your working capital cycle - simply put: How long does inventory remain on the floor and then converted into saleable inventory, and how long does it take for a receivable to be collected.

One of the ways you could achieve a fairly perfect working capital scenario is to delay or not pay your payables, as that would stem the outflow. Naturally that is not practical or recommended, but our point is simply that your working capital financing investment in your current assets is offset by the timing of your payables, which assists in your cash flow cycle.
What are therefore the solutions to business funding? They can be grouped into three areas, new permanent working capital, bank or factor borrowings, or delayed payment arrangements with suppliers. It's that simple.

To assess which method is best for your firm you have to do a couple basic things - first of all understand the turnover of your receivables and inventory - very quick rudimentary calculations can determine that. Hint - Research day's sales outstanding and inventory turnover calculations, which are very basic. Then develop a realistic cash flow forecast, because you now know what the needs are based on the knowledge we have obtained around understanding our turnover and requirements.
Clients we meet are often searching for a 'quick fix 'number - One calculation you can use in a general matter is that your firm requires working capital in the amount of 25% of your sales. That is of course a very general guideline.

To finalize working capital financing and business funding for your company your options are a long term fixed working capital cash loan, in some cases this is called mezzanine or sub debt financing. At the same time you may be in a position to secure bank financing of receivables and inventory, which has become more of a challenge than ever in the current economic and business environment.

Your firm is probably a candidate for a working capital factoring facility, which monetizes your receivables the same day you issue them - this is one form of generating all the working capital financing you need for business funding.

So our bottom line is simply as follows - understand what working capital financing is, calculate how much you need and when and why, and then implement the right solution that matches your business overall needs and credit quality. We encourage you to speak to a trusted, credible, and experienced business financing advisor in this area of Canadian business financing.