Working Capital Line Of Credit Should Not Be A Blue Moon Event

Working Capital Line Of Credit Should Not Be A Blue Moon Event

Working Capital, in our humble opinion, should be a ' Blue Moon ' event. That's of course a term used to mean a rare event and unfortunately a lot of Canadian businesses view their search for a line of business line of credit as somewhat of a search for that ' rare event '. We don't think it has to be that way, so let's dig in.

Not a lot of people disagree with Warren Buffett; one of his many favorite sayings is simply that ' it's all about the cash '. So when we sit down with a lot of clients for an initial conversation we find it interesting that a lot of the talk seems to revolve around sales, profits, debt, equity, etc, but not always about cash flow and working capital. Therein lies the problem.

So while others, including the business owner and financial manager themselves measure their competitiveness and success by sales, profits, etc let's not forget Mr. Buffett€™s focus - cash flow.

Companies such as yours generate cash by asset turnover, and the way you measure, finance and manage and analyze that cash turnover will ultimately be your success.

What are the ways that companies in Canada finance receivables? The best and most common solutions are as follows:

Canadian commercial bank lines of credit

Receivable financing non bank facilities - aka ' factoring' 'invoice discounting Confidential receivable non bank financing ' (the latter being our favorite for clients unable to access bank finance)

Asset based lines of credit

Tax credit financing

Securitization

So what in fact are those ' cash flow drivers€™? One of them is of course accounts receivable. Not necessarily the amount of investment you have in important also) but the timing of those inflows of customer receipts.

When business owners, and dare say it, even financial managers review their accountant or internally prepared financials they always tend to focus on the balance sheet or income statement. The 3rd part o the financial statement is the cash flow statement, and because of its technical nature many owners /mangers fail to grasp how it measures your business success.

Here's a tip of that cash flow statement. Believe it or not some of the smartest financial analysts around tend to read any financial statement by first reading the footnotes to the financials, and then looking at the cash flow statement. By that time they have figured out a lot more about your company than you'd be surprised!

The other key thing about cash flow that's worth discussing when it comes to a business line of credit is simply the fluctuations in cash flow and working capital needs. In some months collections are great, in some they are not, and in those same months you might have larger outflows to suppliers, etc. Sales revenue rarely go up in straight line. So it is often impossible unless you track your sales and A/R trends to anticipate perfect cash flow needs. But you should still try.

Don't underestimate the need for cash flow focus and the use of the right type of line of credit for your firm. That effort allows you to avoid the tragedy and rejection feeling that comes from working capital shortages. Seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you in your working capital needs