subject: May The Force ( Of Business Cash Flow ) Be With You ! [print this page] Business Cash flow management in CanadaBusiness Cash flow management in Canada. That's a very powerful force in the overall success of your business... as they said in the movie ' may the force be with you '.... and here's why and how!
Let's examine some of those forces and focus on what key areas ultimately are critical to your financing success when it comes to working capital, growth, and daily operational survival.
Every Canadian business owner or financial manager probably agrees on the fact that there is nothing more powerful in their businesses than ' cash on hand ', or access to cash via working capital solutions. Early on in business careers we mistaking focus on the fact that profits = cash on hand / available. But it isn't so, as we all quickly discover.
The reality is the cash generated from your business goes into purchasing fixed assets, paying suppliers, etc.
So what are those four key forces of business cash flow management? Simply speaking they are government liabilities, debt and repayment thereof, working capital access, and finally, last but not least, withdrawals of profits from your business.
It's critical that the business owner in manage those forces on an ongoing successful basis. Paying taxes promptly and ensuring debt is repaid in a timely manner are of course job #1 if we had to maintain a pecking order on these things.
A pretty reasonable rule of thumb is that your firm has a couple months of working capital to cover operating expenses outside your credit facility
Working capital, unfortunately, tends to be somewhat of an up and down business for the Canadian business. Is there a good way to get a handle on whether you're winning when it comes to the area working capital forces? There is, and it's to focus on operating cash for your company, which is very easy to calculate.
How is that calc done? Using a month end calc as an example take your profit and add back the positive or negative changes in receivables , payables, and inventory . Example - if receivables went up in the current period that's a negative number, if inventory went down that's a positive number. All of this is in relation to sales of course.
When it comes to business cash flow management and working capital don't make the mistake of confusing term debt and lines of credit. Business credit lines are good things when they fluctuate - if you're always at the top of your bank or asset based credit line that's basically not a good think and you're avoiding the issues of additional permanent equity in the business
Term debt is not a bad thing if it's used for the right reasons. Equipment finance is a solid example of taking on term debt if you are profitable and can retire the lease as agreed, all the while using the asset to generate sales. Real estate debt, as large as it might be is actually good debt given you're building equity with repayment.
What then are our 'take aways '? It's simply that you need to understand your cash cycle, borrow in the right manner, and focus on taxes and equity take outs properly.
In Canada working capital and cash management solutions come from 6 key areas:
Receivable Financing
Inventory Financing
Asset based lines of credit that combine A/R and inventory
Tax Credit Monetization
Securitization facilities
Working Capital Term Loans
Speak to a trusted, credible and experienced Canadian business financing advisor on how your firm can ensure the force (of cash flow and working capital!) is with you!
