Introduction
Working capital finance cash flow challenges in Canada don't require a fortune teller to know that cash challenges exist or will exist around your company's financial health.
Cash flow is the movement of money in and out of a business. A positive and consistent cash flow ensures that a business can meet its short-term obligations, reinvest in its operations, and sustain growth. Without proper cash flow management, even profitable companies can face financial challenges and negative cash flow.
Working Capital Challenges:
These are obstacles businesses face in maintaining sufficient cash to meet their day-to-day operational costs. Key challenges often stem from delays in converting current assets (like receivables and inventory) into cash.
The Perception of Cash Flow:
A company's management of cash flow impacts how external entities view it. Proper cash flow management enhances trust and credibility among suppliers, lenders, and other stakeholders.
Monetize Your Assets:
Rather than accumulating more debt, businesses can improve their liquidity by converting existing assets (like receivables, inventory, and unencumbered equipment) into cash. This process, known as monetization, helps address liquidity challenges without further straining the balance sheet.
Alternative Finance Solutions:
These are non-traditional financing options outside the usual banking system. Given that many businesses may struggle to meet the stringent criteria set by traditional banks, alternative finance solutions offer flexibility. They can be a lifeline for companies needing to address working capital challenges.
The Root of Working Capital Challenges
It would be great to hear our clients say they have no problems in this area of Canadian business financing. Unfortunately, that's rarely the case. Let's dig in.
Understanding the Real Issues
Let's look at the root of some of those working capital challenges: what are the real issues, and what's causing the problems? Next step after that? Solutions!
The Importance of Cash Flow
It's, of course, great to have sales - and sales and profits are even better. In general, when you have those, you have the essence of a healthy business. But those are in effect, what we could call paper transactions, and it always comes back to 100-year-old clichés such as 'cash is king' and 'the sale isn't made until you're paid'.
The Necessity of Cash
That cash is required for all those boring things: paying suppliers, paying employees, and meeting your obligations on loans, leases, leasebacks, and other business commitments.
Addressing the Challenge
Your challenge is typical - how then do you create a flow of cash in the long term, as well as address short-term bulges to ensure you have liquidity?
The Perception of Cash Flow
Naturally, when you have a good handle on cash flow everyone views you in a positive light, most importantly your suppliers and lenders.
Solving Cash Flow Challenges
The solutions to cash flow challenges often come from the inability to plan or address the correct type of cash flow solution. You risk liquidity problems when your current assets can't be converted promptly into cash - those assets are typically receivables and inventory.
Common Working Capital Finance Challenge
There isn't a day when we don't run into a textbook type of working capital finance challenge - it's as simple as requiring a product to satisfy regular or new large orders, generating invoices, and then waiting 30, 60 or 90 days for payment. That is the textbook challenge when we talk to clients asking us for assistance in solving cash flow problems.
Exploring Real-World Solutions
So hopefully, we have done a pretty good job of telling you your problems and challenges - let's address some real-world solutions!
The Core Challenge: Accessing Business Credit
Your inability to access business credit is at the core of working capital finance challenges. We encourage all customers to seek Canadian chartered bank business credit when they are in a position to do so.
Challenges with Traditional Banks
The problem, though? Unfortunately, many clients can't meet business net worth, personal net worth, and liquidity ratios and covenants your bank might require. Also, we firmly believe that inventory financing by banks in Canada is increasingly more challenging to achieve.
The Recommended Solution: Monetize Your Assets
Our recommended solution? Don't borrow - monetize. That's the best advice and plan we set out with clients to solve cash flow problems. You could get a working capital cash flow term loan, which creates additional debt on your balance sheet. Instead, take those assets you already have on your books and monetize them - those assets are the previously mentioned inventory, A/R, and in some cases, tax credits due to your firm and unencumbered equipment.
Achieving Liquidity
Solutions include an asset-based line of credit, or a short-term bridge loan on an asset such as a tax credit or paid for a fixed asset such as equipment.
Exploring Alternative Finance
Many of these solutions are outside the chartered bank system in Canada - they are the new world of 'alternative finance'.
Conclusion
Your ability to monetize your assets, keep suppliers paid and current as well as having the ability to grow your business is key to long-term business success. Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you with your business financing needs.
FAQ
What exactly is working capital finance?
Working capital finance refers to the short-term funding solutions businesses utilize to cover their day-to-day operational costs, including paying employees, suppliers, and other immediate expenses. It ensures companies have enough liquidity to meet their short-term obligations and continue smooth operations.
Why is cash flow so crucial for businesses?
Cash flow represents the movement of money in and out of a business. A positive cash flow indicates that a company generates more revenue than expenses, ensuring it can meet its immediate financial obligations. Effective cash flow management is vital as it impacts a business's liquidity, flexibility, and overall financial health. Even profitable companies can struggle to meet their obligations and grow without adequate cash flow.
How do receivables and inventory relate to working capital challenges?
Receivables (amounts owed by customers) and inventory (goods yet to be sold) are current assets that a business expects to convert into cash. If a company can't quickly turn these assets into cash, it may face liquidity issues. For example, suppose customers take too long to pay or have too much-unsold inventory. In that case, a company might not have the immediate funds required to cover its operational costs, leading to working capital challenges.
What do you mean by "monetizing assets" to solve cash flow problems?
Monetizing assets means converting non-cash assets, like receivables, inventory, or unencumbered equipment, into liquid cash without incurring additional debt. For instance, through a receivable financing program, businesses can get immediate cash by selling their outstanding invoices to a financier rather than waiting for customers to pay. It's a way to get upfront money using assets you already have, helping to solve liquidity issues.
What is "alternative finance," and how does it differ from traditional banking solutions?
Alternative finance refers to financial solutions not provided by traditional banks, such as asset-based lines of credit, receivable financing, or bridge loans on assets like tax credits. While conventional banks often have strict criteria for net worth, liquidity ratios, and other financial covenants, alternative finance providers may offer more flexibility. They can be more accommodating to businesses facing working capital challenges. They often serve as viable solutions when traditional banking avenues are not accessible or feasible.
What is the difference between working capital and net working capital?
Working capital typically refers to the difference between a company's current assets (like cash, accounts receivable, and inventory) and its current liabilities (like accounts payable). Net working capital is essentially the same calculation, emphasizing the "net" aspect, which indicates the balance of assets after subtracting liabilities. A positive net working capital means a company has more current assets than liabilities, suggesting good short-term financial health.
How does a negative working capital impact a business?
Negative working capital occurs when a business's liabilities exceed its assets. This can indicate that the company is facing liquidity issues and may struggle to cover its short-term obligations. However, negative working capital might not always signal financial distress in some industries or business models, such as those with consistent cash flow and cash equivalents or rapid inventory turnover.
What internal measures can a company take to improve the company's working capital without external financing?
Companies can adopt several internal strategies to improve their working capital position. This includes tightening credit terms with customers, optimizing inventory management to reduce carrying costs, renegotiating terms with suppliers for extended payment cycles, regularly reviewing and streamlining operations to cut unnecessary costs, and selling off non-core assets or obsolete inventory. The cash flow statement for a company's cash flow is a key source of financing considerations for positive working capital solutions
How do seasonal businesses manage their working capital challenges?
Seasonal businesses, which see significant revenue fluctuations throughout the year, often face unique working capital challenges. To manage these, they might build up cash reserves during peak seasons to cover expenses during off-peak times, negotiate flexible terms with suppliers, adjust inventory levels based on seasonal demand, and possibly diversify product or service offerings to generate revenue during slower periods. They may also consider short-term financing options to bridge cash flow gaps.
Why is the operating cycle important in the context of working capital?
The operating cycle, or cash conversion cycle, measures the time it takes for a company to buy raw materials, produce goods, sell them, and finally receive cash from the sale. It's directly linked to working capital as a longer cycle might mean that cash is tied up in inventory or receivables for extended periods. Understanding and optimizing the operating cycle can help businesses manage their working capital more efficiently by speeding up the conversion of assets into cash.
