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Small Business Cash Flow Management - Solving Cash Flow Problems
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Financing & Cash flow are the biggest issues facing business today
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7 Park AvenueFinancial
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8
Struggling to keep your business afloat due to cash flow issues? Discover the strategies that can turn the tide.
"Beware of little expenses; a small leak will sink a great ship." – Benjamin Franklin.
7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer Solutions for Cash Flow Problems and working capital solutions – Save time and focus on profits and business opportunities
7 Park Avenue Financial: “Canadian Business Financing with the intelligent use of experience”
Solutions for Cash Flow Problems: Business Cash Flow Solutions
Business cash flow management wouldn’t be required if we could all sell on cash to our clients, but business cash flow problems are a common challenge.
However, unless your business is 100% retail, that, of course, can’t be the case. So, let’s examine essential and valuable ways to address the management of working capital solutions and how to borrow money effectively in Canada.
SALES GROWTH PLACES DEMANDS ON CASH FLOW NEEDS
Sales growth is good… right? Well, because those sales require financing and management of your current debt, leading to significant cash flow challenges.
So, today, for our purposes, we are discussing managing that liquidity issue and solving cash flow problems via financing solutions and internal management tools.
A/R COLLECTIONS IS IMPORTANT TO REDUCING FINANCING COSTS AND IMPROVING PROFITS
The longer your receivables go unpaid, the more issues you will have —first, there is a chance the sales might be uncollectible at some point, and second, you will have higher financing costs.
And that’s whether you are financing through a bank or non-bank solutions. (Yes, there are non-bank solutions when it comes to financing A/R.)
SUCCESSFUL COMPANIES MEASURE THEMSELVES ON ASSET TURNOVER PERFORMANCE
It’s therefore essential to continually assess your asset turnover - one basic tool being a days sales outstanding calculation.
It’s, therefore, important to continually assess your asset turnover and manage your business expenses effectively to maintain healthy cash flow. Also, at the heart of the matter is your firm’s philosophy of granting credit and setting client limits.
Oh… by the way… the largest corporations in the world do that also; it’s one way they get large and successful! So why shouldn’t your firm?
CONSIDER OFFERING A PROMPT PAYMENT DISCOUNT TO YOUR CUSTOMERS
The challenge of asking customers to pay their bills is ongoing for any business selling ‘ B2B ‘.
Naturally, there is a potential cost in addressing a new credit policy as not all clients will want to pay within your stated terms and may consider other vendors. One way to address that issue is to offer a prompt payment discount - typically called ‘ 2 % 10 ‘.
That simply means that you are giving up 2% of your gross margins for the ability to collect A/R faster and generate business cash flow. So that is clearly on management solution you can consider.
THE ULTIMATE SOLUTION FOR SALES GROWTH AND CASH FLOW PROBLEMS AND SOLUTIONS?
That brings us to the actual financing of your receivables.
Financing your receivables ensures steady cash inflows to support your business operations. This is a critical part of every company’s finance strategy and success.
The heart of the matter is simply financing your sales at a cost that your firm can bear while at the same time generating the maximum amount of cash that you require.
HOW DOES FACTORING / AR FINANCING WORK?
One of the fastest-growing and most popular methods of financing A/R is called ‘factoring,’… aka ‘invoice discounting.’
Accurate cash flow forecasts are essential to determining the financing needed through factoring. To clarify how this works, let’s use a simple example:
If you have 100k in receivables, you receive 90k as soon as you generate your sales. That’s instant cash. When your client pays, you receive the balance, i.e., the 10k, less financing costs.
UNDERSTANDING YOUR TRUE COST OF FINANCING WITH A CASH FLOW FORECAST
And those financing costs?
They are very similar to your strategy of offering a prompt pay discount as we noted above. Understanding the true cost of financing includes considering the impact of interest payments on your cash flow.
While this cost seems high to many, you are already incurring it by carrying receivables, or offering discounts, and not being able to take discounts with suppliers.
Our recommended solution to clients is a ‘confidential invoice financing facility‘ that allows you to bill and collect your receivables without intrusion from any third party. It’s all about managing cash flow with the right business finance solution!
So, one key point today is to evaluate the criteria under which you can finance your sales via a receivable factoring arrangement. The costs may not be what you think! Focusing on good cash flow projections will always help solve a cash flow problem.
A FACTORING ALTERNATIVE FOR CASH FLOW ISSUES?
Getting customers to pay to your payment terms for goods and services you have delivered is an eternal challenge for small and medium-sized businesses in Canada. Those firms represent a huge part of the Canadian economy.
Maintaining adequate cash reserves is crucial for navigating reduced revenue and unexpected expenses.
Finally, the alternative to factoring accounts receivable is simply bank financing via commercial lines of credit. Canadian chartered banks offer A/R credit lines that are generally based on the quality of your A/R and the overall quality of your financials – so caveat emptor here -
You need to demonstrate profits and create a balance sheet that meets bank criteria. Under bank credit lines, 75% of receivables are generally margined.
A business line of credit is a solid short-term solution for working capital funding if your business qualifies. Long term business capital needs may also have to sometimes be considered. Running your company on business credit cards isn’t always the optimal solution!
KEY TAKEAWAYS
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Cash Flow Forecasting: Mastering this ensures you anticipate future cash needs, preventing shortfalls.
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Working Capital Management: Efficiently managing receivables, payables, and inventory optimizes cash flow.
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Short-Term Financing: Knowing your options, such as lines of credit and invoice factoring, provides quick access to cash.
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Expense Control: Reducing unnecessary expenses immediately boosts available cash.
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Revenue Stream Diversification: Expanding income sources stabilizes cash flow against market fluctuations.
CONCLUSION
So, here we are - it’s decision time. How can a business manage cash flow? Savvy business owners can utilize some internal and external tools and resources to accelerate working capital -
Preparing regular and realistic cash flow projects on incoming cash receipts from collections and outgoing payables
Consider a sale-leaseback option for assets paid for and having value to the business.
Applying for traditional or alternative lines of credit will protect against a cash flow crunch as small businesses will always need to address accounts payable and day-to-day funding needs.
Utilizing lease financing when acquiring assets that will have a useful economic life to the business
Implementing these strategies can help ensure your business maintains a positive cash flow.
Use our information to address business cash flow solutions via effective cash flow management, credit policy, and financing solutions such as factoring and commercial bank facilities.
If you believe cash is king in business credit, call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you with the right solution.
FAQ
What are the best solutions for cash flow problems?
The best solutions include cash flow forecasting, optimizing working capital, and using short-term financing like lines of credit or invoice factoring.
How does cash flow forecasting help?
It helps anticipate future financial needs, allowing businesses to plan for potential shortfalls of negative cash flow and avoid disruptions in moving excess inventory
What role does working capital play in solving a business's cash flow problems?
Efficient working capital cash management ensures a business can meet its short-term obligations, enhancing overall cash flow.
How can invoice factoring improve cash flow?
Invoice factoring provides immediate cash by selling unpaid invoices to a third party, reducing payment waiting times and enhancing a company's cash flow by avoiding taking on debt or debt consolidation
What is the benefit of diversifying revenue streams?
Diversifying revenue streams ensures that a business is not overly reliant on a single source of income, stabilizing cash flow.
What should a business consider when choosing a line of credit?
Companies should consider interest rates, repayment terms, and the flexibility of the credit line to match their cash flow needs when faced with the challenge of addressing funding when they experience cash flow problems.
How can expense reduction impact cash flow?
Reducing unnecessary expenses to eliminate unnecessary costs frees up cash that can be reinvested into the business or used to meet financial obligations.
What are the risks of relying on short-term financing?
Relying too heavily on short-term funding such as merchant cash advances with multiple payment methods can lead to a cycle of debt, making it essential to have a clear repayment strategy.
How does accounts receivable financing work?
It involves selling unpaid invoices to a lender and providing immediate cash while outsourcing collection efforts.
Why is cash flow management important for small businesses?
Effective cash flow management is crucial for small businesses as it ensures they can meet their financial obligations and invest in growth opportunities.
What is dynamic discounting, and how does it help cash flow?
Dynamic discounting allows businesses to offer flexible payment terms to customers, incentivizing early payments and improving cash flows.
How can crowdfunding be a solution for cash flow problems?
Crowdfunding allows businesses to raise small amounts of money from a large group of people, providing quick access to cash for specific projects without incurring debt and solving common cash flow problems as well as having an emergency fund
What is the benefit for small business owners using inventory as collateral for financing?
Using inventory as collateral allows businesses to unlock cash tied up in unsold stock, providing a source of funds without taking on additional debt.
