YOUR COMPANY IS LOOKING FOR WORKING CAPITAL
MANAGEMENT AND FINANCE SOLUTIONS!
You've arrived at the right address! Welcome to 7 Park Avenue Financial
Financing & Cash flow are the biggest issues facing business today
ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?
CALL NOW - DIRECT LINE - 416 319 5769 - Let's talk or arrange a meeting to discuss your needs
EMAIL - sprokop@7parkavenuefinancial.com
7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
Working Capital Financing Solutions
Working capital management in Canada should be a priority for Canadian business owners and financial managers.
Financing working capital is crucial for maintaining liquidity and supporting daily operations and short-term asset investments.
So, when it comes to understanding cash flow finance, we maintain it’s a bit of a science (or art?).. and some of the information is a bit of fiction or fallacy. Need clarification? Let’s dig in.
CASH FLOW CRUNCHES? SMART SOLUTIONS FROM 7 PARK AVENUE FINANCIAL FOR YOUR BUSINESS NEEDS
Canadian businesses - Particularly SMEs, frequently struggle with insufficient working capital to fund daily operations.
Without adequate funds, you risk missing growth opportunities, losing supplier discounts, and potentially damaging vendor relationships.
Let the 7 Park Avenue Financial team show you how Working Capital Financing provides quick, flexible funding to bridge cash flow gaps and keep your business running smoothly.
Two Uncommon Takes:
- Working Capital Financing can actually improve supplier relationships by enabling early payment discounts
- It's often more cost-effective than equity dilution for seasonal businesses
Did You Know?
- 82% of business failures are due to poor cash flow management
- Working capital loans average approval rate is 65%
- 73% of businesses use some form of working capital financing
- Average working capital cycle is 60-90 days
CASE STUDY
"ABC Manufacturing " faced seasonal challenges with their production cycle. By implementing a $500,000 working capital financing solution, they:
- Increased inventory purchasing power
- Reduced supplier costs
- Improved cash flow cycle by 25 days
- Boosted annual revenue by 28%
- Achieved 45% growth in two years
Result: The company transformed from struggling with seasonal demands to becoming an industry leader in their niche, demonstrating the strategic impact of well-structured working capital financing.
DETERMINING THE AMOUNT OF WORKING CAPITAL YOU NEED
As a business, the levels of your working capital, determined by the difference between your company's current assets and current liabilities, dictate the amount of cash you will need and use in your day-to-day operations and growth plans, as well as allowing for capital expenditures in the assets you need to grow business.
Calculating Working Capital
Calculating working capital is a straightforward process that involves subtracting a company’s current liabilities from its current assets. The formula for working capital is:
Working Capital = Current Assets - Current Liabilities
Current assets include:
Current liabilities include:
-
Accounts payable
-
Short-term debt
-
Taxes owed
-
Wages and salaries owed
-
Interest owed
For example, if a company has $100,000 in current assets and $50,000 in current liabilities, its working capital would be $50,000.
This calculation helps businesses understand their liquidity and ability to meet short-term financial obligations, ensuring adequate working capital to support daily operations and growth.
ENSURING ADEQUATE WORKING CAPITAL
THAT TEXTBOOK DEFINITION IS NOT THE REAL-WORLD
We are always somewhat amused by the ‘textbook’ definition of working capital, which maintains that if your current assets, such as accounts receivable and inventory, can be converted to cash within a year, you have net working capital.
Another fallacy, it seems to us at least, is that the larger current ratio is desirable.
Short-term assets like cash, accounts receivable, and inventory are crucial in assessing a business's liquidity and ability to meet current financial obligations.
They play a significant role in maintaining day-to-day operations and managing working capital effectively to avoid financial pitfalls.
In fact, probably the best tool for understanding funds flow is your own cash flow statement, which shows the source and uses of funds.
Note also that managing short-term current liabilities such as accounts payable is a key tool in cash management.
Working capital and cash flow are often misunderstood concepts, and we forgive our clients for not understanding that! Understanding current assets and current liabilities is best achieved by taking a deep dive into your financials and setting up some performance metrics.
IT'S ALL ABOUT ASSET TURNOVER!
In our words, those last two points are some of the ' fiction ' we're discussing. Why? Simply because in the real world (where we work every day), asset turnover needs to happen with much more emphasis than a 12-month timeframe.
Furthermore, delve deeper into the textbook definition of current ratio liquidity. You just might find that the great current ratio your accountant or banker maintains you have simply masks poor inventory management turnover and slow or uncollectible accounts receivable.
Converted into cash, those key assets drive your day-to-day funding needs and are a true measure of a company's success. Those inflows and outflows determine your operating activities, financial health, and company liquidity and measure how you generate enough cash to grow sales for your products and services.
UNDERSTANDING YOUR OPERATIng CYCLE
The best way to determine if your cash management and working capital are ' working ' is to take a close look at your operating cycle. That’s the time it takes for $1$ to flow through your company from taking an order to collecting cash.
Since working capital management is all about paying and reducing accounts payable, any current assets that can't always cover payables in their turnover must be financed.
7 CASH FLOW FINANCING METHODS
FINANCING THE BALANCE SHEET
What are the ways to finance short-term debt and working capital financing cash flow needs?
They include these working capital financing options :
Bank lines of credit/bank loan
Non-bank asset-based lines of credit facilities
Accounts Receivable Financing
Purchase Order Financing
Inventory Financing
Short-term working capital loans / Merchant advances / Business credit cards
Tax credit monetization of SR&ED Receivables
Government Loans via the CSBF program
Working Capital term loans
Additionally, equity financing is an alternative method for businesses to raise capital by selling shares. This method differs from the listed options as it does not require repayment but involves giving up a portion of ownership.
DEBT VERSUS MONETIZING EXISTING ASSETS
In all cases except for the above-mentioned working capital term loans, you are not taking on debt as a long-term option - you’re just monetizing tangible assets.
CASH FLOW DOES NOT EQUAL PROFIT!
Always track the current and projected sales level about your cash flow and working capital needs. Sales are not ‘ gratis’ - they have costs associated with them, and remember that profit does NOT equal cash on hand.
A working capital loan can help manage cash flow and meet short-term financial obligations like rent and payroll.
Factors to Consider When Choosing Working Capital Finance
When choosing a working capital finance option, several factors should be considered to ensure the best fit for your business needs:
-
Interest Rates: Different types of working capital finance have varying interest rates. To minimize borrowing costs, it’s crucial to select an option with competitive interest rates.
-
Repayment Terms: Evaluate the repayment terms, including the duration and any fees for early repayment. Flexible terms can help manage cash flow more effectively.
-
Collateral Requirements: Some working capital finance options require collateral, such as accounts receivable or inventory, while others do not. Weigh the risks and benefits of providing collateral.
-
Flexibility: Consider the flexibility of the finance option, such as the ability to draw down funds as needed and the option to repay early without penalties.
-
Fees: Be aware of any associated fees, including origination fees, maintenance fees, and late payment fees, as these can impact the overall cost of the finance option.
By carefully considering these factors, businesses can choose a working capital financing solution that aligns with their financial goals and operational needs.
Working Capital Loans for Business Growth
Working capital loans can be a powerful tool for financing business growth.
These loans provide the necessary funds to invest in new opportunities, expand operations, and increase revenue. Working capital loans can be used for various purposes, including:
-
Hiring new employees
-
Investing in new equipment or technology
-
Expanding into new markets
-
Increasing inventory levels
-
Financing marketing and advertising campaigns
Working capital loans can be secured or unsecured, with various repayment terms available. Choosing a loan that meets your business’s specific needs and carefully reviewing the terms and conditions before committing is essential. By leveraging working capital loans, companies can seize growth opportunities and enhance their competitive edge.
Common Challenges in Working Capital Management
Managing working capital can be challenging, particularly for small and medium-sized businesses. Some common challenges include:
-
Managing Cash Flow: Effective cash flow management is crucial, involving carefully handling accounts receivable, accounts payable, and inventory levels to ensure liquidity.
-
Maintaining Sufficient Working Capital: Businesses must maintain sufficient working capital to meet financial obligations and invest in growth opportunities.
-
Managing Risk: Capital management involves mitigating risks such as late payments, inventory obsolescence, and market fluctuations.
-
Optimizing Working Capital: Businesses must optimize their working capital to minimize costs and maximize returns, ensuring efficient resource use.
Addressing these challenges requires a strategic approach to working capital management, focusing on maintaining liquidity and supporting business.
By following these best practices, businesses can maintain sufficient working capital, improve cash flow, and support sustainable growth.
KEY TAKEAWAYS
-
The cash conversion cycle fundamentally drives working capital needs
-
Revenue timing impacts determine the optimal financing structure
-
Seasonal fluctuations require strategic planning approaches
-
Credit terms significantly affect working capital requirements
-
Inventory management directly influences financing needs
CONCLUSION
If you're looking for cash flow finance solutions for your company's short-term working capital needs!
Call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor who can assist you in sorting out the facts and fiction of working capital management and finance to manage cash and address financial performance.
FAQ
How does working capital financing improve business operations?
-
Maintains consistent cash flow
-
Enables bulk purchase discounts
-
Supports seasonal inventory needs
-
Facilitates growth opportunities
-
Strengthens vendor relationships
What makes working capital financing different from traditional loans?
What collateral is required?
-
Various options available
-
Accounts receivable often sufficient
-
Inventory sometimes accepted
-
Personal guarantees may be needed
-
Real estate not typically required
How do lenders evaluate working capital applications?
What documentation do I need to apply?
What credit score is required?
-
Personal credit score requirements vary by lender
-
Business credit history is also considered
-
Some alternative lenders focus more on cash flow than credit
