Canadian business owners and financials managers need to know potential sources of working capital financing to ensure they can grow and profit from sales opportunities. Operating capital is viewed as one of the most critical aspects of ongoing financial liquidity; simply put, the ability to meet your short term and long term obligations.
Most financial people agree that if your business has more access to working capital your chances of overall financial success are greatly increased. The bottom line is that you have the working capital to expand and grow your business.
The textbooks of course have a definition for working capital, however the real world use and understanding of that term differs somewhat. Finance books tell us working capital is calculated by subtracting current liabilities from your current assets. The major current assets are receivables and inventory. When we meet with clients to discuss their working capital needs we focus moreso on two issues within those working capital components that the finance textbooks don’t really touch on?
– Turnover of working capital
– Margining of working capital
So the key point for business owners is not really what the text books says, it is that you need to be able to understand how to convert these assets into cash . We do of course agree thought that positive working capital (what you have) is better than negative working capital (what you owe)!
Sitting down with clients and working through changes in their working capital is one of the most valuable tools in understanding your current and future cash flow needs.
A fine balancing act is created, on in which you are liquidating your receivables and inventory on an ongoing basis, but at the same time managing to keep your short term obligations to suppliers current.
Another hard reality of business financing is that working capital varies by company and in general by industry. The amount of turnover in inventory and A/R varies considerably in every business.
We have discussed the definition and importance of working capital. So what are the sources of those funds? In a perfect world your company should have an overdraft or operating line of credit with the bank. The is the cheapest and lowest cost method of financing short term cash and working capital needs in Canada. The challenge is of course being able to meet the banks criteria for lending, which include personal guarantees, additional collateral possible, and imposed loan covenants and ratios.
A growing and more popular solution is asset based lending, this has little focus on the bank qualities demanded by Chartered banks and is more focused on what we discussed above, your firms ability to margin and leverage current assets and turn them over more quickly, thereby increasing sales and profits, albeit at a higher financing cost s. For smaller firms this might simply be a factoring or invoice discounting solution.
Ultimately each Canadian business owner must understand their working capital needs and determine which solution works best for them. Plan for growth, and Speak to a trusted, credible and experienced financing advisor to understand what sources of capital are available and which work best for your company.