Just picture your firm having access to all the working capital you need. Seem impossible? Not really… if you have a solid understanding of your options and your firms capability of qualifying or executing on those options.
Whether you’re the largest corporation in Canada or a small new start up (and everything in between) your business needs working capital. In Canada small business financing loans and financing arraignments for working capital are limited to a handful of possibilities – but being aware of what they are and qualifying for them could be the solution to your constant focus on cash flow via some sort of working capital loan.
It is probably easier than you think to ensure you are addressing the cash flow challenge correctly – where it gets somewhat ‘ thorny ‘ is matching a solution to the problem or locating an expert that can provide you with the business financing assistance you need.
Two key elements of your first step working capital assessment are your gross margins and your turnover. That’s the big problem we have with text book / academic solutions to working capital – they point you to the text book calculation – give you a formula which essentially has you subtracting current liabilities form current assets, and voila! the inference is you have working capital. However, our clients have never paid a supplier or completed a company payroll with a ratio!
To properly assess your working capital needs focus on understanding your turnover – how much inventory do you carry, what are the days outstanding in inventory, and as importantly, or more importantly, are your receivables turning over. Have you realized that for many firms 80% or so of the total of all the business assets you have are tied up in A/R, inventory, and, on the other size of the balance sheet let’s not forget payables.
So can you have financial success based on your new found knowledge and analysis of your cash flow and asset turnover. We think you can.
Canadian business financing solutions to small business finance loans really revolve around a couple viable solutions. Typically, in our experience Canadian chartered banks cant satisfy your business working capital needs – if only for the reason that they rarely finance inventory and require significant merit in your overall financials, profitability, external collateral, personal credit worthiness, etc.
So, where do you go from there? The other solutions are very viable and can take you to a potential 100% turn around in cash flow – they include working capital financing as a bundled line of credit on a/r and inventory via an independent finance company. For firms that are larger we believe the ultimate tool is an asset based line o f credit that provides high leverage margining on all you business assets. Other more esoteric solutions, but still very viable although somewhat misunderstood are securitization, and purchase order financing of new contracts and orders. (Your suppliers are paid directly for the orders you have in hand – what could be better than that?)
Finally, coming up the road at lightening speed is factoring and invoice discounting. We mention them lastly but they are probably the most popular method, gaining traction everyday. Our favorite is confidential invoice financing, allowing you to control your financing.
So there you have it. You have identified new ways to determine the need; we have outlined 4 or 5 solutions that will take the guess work out of working capital. These loan and financing options are available with a bit of research, and, if you choose, speak to a Canadian business financing advisor who can provide you with timely and valuable assistance in your cash flow needs.
Archive for October, 2011
Guess What Your Business Needs? Working Capital and Small Business Finance Loan/Loans Options
Tuesday, October 25th, 2011Capital Budgeting
Friday, October 21st, 2011
Capital budgeting is a process of planning expenditures incurred on assets whose cash flow is expected to range beyond one year. In other words, it is defined as a process that requires planning for setting up budgets on projects expected to have long-term implications. It can be used for processes such as the purchase of new equipment or launching of a new product in the market. Businesses prefer to intricately study a project before taking it on, as it has a great impact on the company’s financial performance.
Some of the projects that use capital budgeting are investments in property, plants, and equipment, large advertising campaigns, and research and development projects.
The success of a business depends on the capital budgeting decisions taken by the management. The management of a company should analyze various factors before taking on a large project. Firstly, management should always keep in mind that capital expenditures require large outlays of funds. Secondly, firms should find modes to ascertain the best way to raise and repay the funds. The management should also keep in mind that capital budgeting requires a long-term commitment.
The requirement for relevant information and analysis of capital budgeting has paved the way for a series of models to assist firms in amassing the best of the allocated resources. One of the oldest methods used is the payback model; the process determines the length of time required for a business to recover its cash outlay. Another model, known as return on investment, evaluates the project based on standard historical cost accounting estimates.
Popular methods of capital budgeting include net present value (NPV), discounted cash flow (DCF), internal rate of return (IRR), and payback period.
While working with capital budgeting, a firm is involved in valuation of its business. By valuation, cash flow is identified and discounted at the present market value. In capital budgeting, valuation techniques are undertaken to analyze the impact of assets instead of financial assets.
The importance of capital budgeting is not the mechanics used, such as NPV and IRR, but is the varying key involved in forecasting cash flow. The importance of capital budgeting is not only its mechanics, but also the parameters of forecasting the incurrence of cash in the business.
Working Capital Financing
Monday, October 17th, 2011
All businesses have some sort of an operating cycle. This is essentially the time it takes from purchasing needed materials or supplies and converting them into a finished product that can be sold. The operating cycle further consists of selling those products and collecting payment for all that effort. Once products are sold and payments collected, the cycle is completed.
For retail businesses (including online businesses) the cycle starts with purchasing products for resale (inventory) then displaying those products on shelves or on web pages, closing the sale and collecting payment.
Even service businesses, while their operating cycle can be much shorter, still see a time lag between providing the service (to include any purchases of material or labor to complete the job) and collecting payments from customers.
It is because of this time lag that working capital financing comes into play.
All these businesses need some form of assets, be it inventory, materials, supplies, labor, etc. (usually termed: current assets) that can quickly flow through the operating cycle and be converted into cash (revenue). This is essentially what business is. Once payment (revenue) is received, the company can then use any operating cycle profits (gross margin) to cover overhead expenses like salaries, marketing, loan payments and interest, capital purchases, or any fixed general, administration or selling expenses.
The problem that arises for most businesses (especially small and growing businesses) is not having the cash on hand to purchase the needed materials to complete their operating cycle. Not only do some businesses not have the cash or capital to purchase needed materials they may also not be able to cover other variable costs related to the operating cycle like paying labor, landlords, utilities, etc.
In a perfect world, all businesses would have the necessary financial wherewithal to cover all expense while waiting for payment. But, the business world is not perfect. Most businesses have to wait anywhere from one day to years to complete their cycles and get paid by their customers (typical operating cycles usually last from a few weeks to a few months but depend on the industry and business).
But, in the mean time, while these businesses transform goods into finished products or services and wait to be paid by their customers (or wait to see if they can even sell the products or services they offer), their suppliers and vendors, landlords, utility companies, employees, IRS, bankers, etc. all want to be paid now and not wait for the business to receive payments; keep in mind that these businesses are also facing their own time lag in their operating cycles. Thus, for businesses that do not have the cash on hand to meet these expenses, they must turn to working capital financing or face going out of business.
Working capital, by definition, is the difference between current assets and current liabilities where current liabilities are used to finance current assets; and the conversion of those current assets into revenue is what is used to pay off those current liabilities.
There are many methods to working capital financing; here are a few of the most common:
Trade Credit: The fastest and most efficient way to finance materials or supply is via trade credit. How it works is simple. You purchase goods from your vendors or suppliers. They tell you that you can delay payment for those goods for 60 days. This 60 day period will give your business time to convert those goods, via your operating cycle, into revenue in which to repay the vendor or supplier. If you are not currently getting trade credit terms from your vendors – you might think about asking for them. If you are, you might look into getting them extended. The longer the payment delay terms, the better for your business as it has more time to convert those goods into revenue.
Business Lines of Credit (BLOC) are short term revolving credit lines (usually with a 12 month or less term) and are specifically designed for working capital needs. These credit lines allow businesses to purchase needed material, supplies, labor etc., convert those into some form of revenue over a very short period and pay back the borrowed funds as soon as possible. BLOCs are usually revolving lines meaning the business can pay them down from one operating cycles and draw on the line again for another operating cycle. Most BLOCs are set for 12 month periods as these lines are meant for short-term financing only and from a banker’s prospective should be paid to zero some time during each of the business’s operating cycles.
Business Cash Advances: These cash advances are not loans but advance against future sales. These advances are great methods of working capital financing as they allow businesses to receive capital up front and pay it back from future sales. Business cash advances are usually based on the total revenue of the business but do require the business to accept credit cards as a form of payment from their customers – as it is these credit cards receipts that are used to pay back the advance. Very good working capital products for retail (online and brink and mortar) as well as service businesses.
Accounts Receivable Factoring: Some businesses may find themselves in (according to baseball terms) as pickle – stuck between waiting for customers to pay on one side and having trade partners (vendors and suppliers) demanding payment on the other side. Let’s say your business purchases materials Net 10 days – meaning that you have 10 days to pay in full for those materials. You convert those goods into finished products in 5 days and ship them to your customer with a NET 30 day invoice – meaning your customer has 30 days to pay you. In these situations, Accounts Receivable Factoring can be used to obtain the working capital needed to pay off the supplier as well as purchase additional materials for another operating cycle. Then, when payment is received by your customer, the business can repay the Accounts Receivable loan or line of credit and use the remaining gross margin profits to cover other costs and overheads. Most factoring company will advance 80% of the invoice amount and base their approval decisions on your customer’s creditworthiness.
Purchase Order Financing: Purchase Order Financing is a great method of securing working capital for a business’s operating cycle. Let’s say that your business has one or more jobs that need to be completed but finds itself without the needed working capital to complete the job(s). A purchase order factor may advance your business the funds (up to 80% of the purchase order amount) – essentially paying your supplier or variable costs on your behalf – so that you can complete the orders, satisfy your customers and earn a profit.
Lastly, and this cannot be emphasized enough, working capital financing is short-term financing and should only be used for short-term needs. Keep in mind that most operating cycles are very short periods – usually less than 90 days. Thus, any financing to be used in the operating cycles should be short-term – matching that 90 day period. Anything else is bad financial management as the business would be paying far more in interest and fees if it uses long-term financing options for short-term, working capital needs.