Unlock Hidden Cash with Smart Receivable Finance Strategies
Stan Prokop
Canadian Business Financing | Cash Flow Financing | Asset Based Lending | Equipment Finance | Lender Financing | Purchase Order Financing | Acquisition Financing | SAAS Financing | Acquisition Financing
"Receivables are the lifeblood of a business. Receivable finance is the transfusion that keeps that blood flowing." - Anonymous Financial Advisor
7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We Receivable Finance and working capital solutions – Save time and focus on profits and business opportunities
7 Park Avenue Financial: “Canadian Business Financing with the intelligent use of experience”
A Cautionary Tale Of Receivable Finance & Working Capital
Have we got a story for you! There's an interesting old story /legend about a guy named Bernard E. Smith who, at the time of the 1929 Wall Street crash, went around and saw what companies were building up receivables and inventory and maybe not selling enough.
We're not really focusing on ‘sales ' today, though. The bottom line of this legend is that by simply observing the buildup in receivables (and inventories), he became somewhat of a predictor for companies that would fail.
WHAT IS WORKING CAPITAL
Our friend at the ' textbook ' tells us that it is simply the relationship between your balance sheet accounts of current assets and current liabilities -
Knowing the relationship between those two allows you to measure your company's financial health in terms of asset turnover and cash generation.
These accounts are short-term funding components of your business—the day-to-day funding of your business relating to payables, payroll, fixed-cost commitments, etc.
Every company and industry has a business cycle that measures how cash turns over in your company.
When Do You Know You Require Accounts Receivable Financing
Receivable finance in Canada. Exactly what is included in working capital, and when does your firm know it needs something new when financing working capital and understanding what solutions are available and when?
If you have a strong handle on receivables in your company, you'll be able to know a lot about your cash flow and working capital.
When we look at what our buddy Bernard Smith was doing, he probably would have profited even more (he was ' shorting 'those companies ) if he had simply had solid access to an analysis of any company’s' A/R position.
THE CRITICAL RELATIONSHIP BETWEEN SALES AND ASSET TURNOVER
You're a more effective business manager or owner when you truly understand the relationship between sales and properly managed accounts receivable.
That’s because you can only run so long on the concept of sales, which one analyst called ' borrowing from the future '.
THE SALES/AR RELATIONSHIP - GROWTH AND INVESTMENTS IN RECEIVABLES
Financing working capital is needed when receivables rise substantially over sales growth. Poor collections and liberal credit terms are other causes, and those require separate measures and actions.
But today, we're focusing on simple ' growth ‘and the relationship between working capital accounts of receivables, payables, and inventories.
Asset turnover management allows you to answer the question of' how to improve current ratio performance ' in your cash flow cycles.
So, two things. How can you track such a phenomenon? Secondly, what is one solid solution for receivable financing in Canada?
YOU CAN TRACK YOUR SALES/RECEIVABLES RELATIONSHIP - HERE IS HOW
When tracking, set up a straightforward chart or spreadsheet around sales/receivables and inventory.
Track the actual growth rates, say quarterly or even monthly, over a specific period. (We’d say annually was a bit too late!)
If sales grow at 15%, for example, and A/R and inventories grow at 35%, you will quickly start to feel a working capital and cash flow shortage. It's as simple as that!
IS BANK FINANCING AN OPTION
So, if you can’t get support from a bank in Canada on your A/R and growth, then perhaps it's time to look at another option.
That option is known as receivable finance, or invoice discounting is another term. You might not be able to get additional financing because you're growing too fast, or in some cases, you can’t meet bank criteria.
That's when it comes time to rethink your Canadian business financing strategy.
The cost of factoring is often a consideration or concern, and business owners can address this by effectively understanding how they can use the capital generated from invoice financing. If you have good gross margins, you're even better positioned to assess the cost of receivable finance.
So, how to control working capital - we've shown it's all about staying on top of receivables and inventory balances, managing payables effectively, which can be a solid cash flow driver, and finally, understanding your Canadian business financing options.
Three uncommon takes on receivable finance:
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KEY TAKEAWAYS
CONCLUSION
Tired of waiting for customers to pay? Turn your invoices into instant cash with receivable finance!
Let our team assist you in monitoring working capital needs and assessing quality solutions for business cash flow and growth to capitalize on the true meaning of the working capital cycle and how it affects your long-term business success.
FAQ
How does receivable finance improve my business's cash flow?
Receivable finance converts unpaid invoices into immediate cash, providing a steady stream of working capital to cover operational expenses and invest in growth opportunities.
Can receivable finance help me take on larger projects or orders?
Yes, receivable finance enables businesses to confidently accept larger projects or orders without worrying about immediate cash flow constraints by providing quick access to cash from outstanding invoices.
Is receivable finance a good alternative to traditional bank loans?
Receivable finance offers more flexibility and faster access to funds than traditional bank loans, making it an attractive option for businesses seeking quick and hassle-free financing.
How can receivables finance support my business during seasonal fluctuations?
By providing consistent cash flow based on your invoices, receivable finance helps smooth out the financial impact on the company's balance sheet of seasonal ups and downs, ensuring that accounts receivable financing offers assistance for stable operations year-round.
Will using receivable finance affect my relationships with customers?
When implemented professionally, receivable finance can improve customer relationships by allowing you to offer more flexible payment terms without compromising your own cash flow.
What types of businesses can benefit most from receivable finance?
Receivable finance is particularly beneficial for B2B companies with longer payment cycles on the company's accounts receivable, businesses experiencing rapid growth, and those in industries with seasonal fluctuations.
How quickly can I access funds through receivable finance?
Typically, businesses can receive funds within 24-48 hours of invoice submission, making it one of the fastest financing options.
Are there any downsides to using receivable finance?
While receivable finance offers many benefits, it's important to consider the costs involved and the potential impact on profit margins. It's crucial to weigh these factors against the advantages of improved cash flow.
Can I choose which invoices to finance, or do I need to finance all of them?
Many receivable finance providers offer flexibility in selecting which invoices to finance, allowing you to tailor the service to your needs based on working with the right factoring company.
How does receivable finance differ from a line of credit?
Unlike a line of credit, receivable finance is secured by your invoices and typically doesn't require additional collateral. It also scales with your sales, potentially providing more a/r funding as your business grows.
What factors should I consider when choosing a receivable finance provider?
Consider the provider's reputation, fee structure, advance rates, technology platform, and additional services, such as credit checks on your customers.
How can receivable finance help my business expand into new markets?
Receivable finance can provide the working capital needed to fund expansion efforts, cover upfront costs, and manage the cash flow challenges associated with entering new markets or serving new customers.
What steps can I take to maximize the benefits of receivable finance for my business?
To maximize benefits, maintain clear invoice records, choose invoices strategically, negotiate favourable terms with your provider, and use the improved cash flow to invest in growth opportunities or optimize operations.
' Canadian Business Financing With The Intelligent Use Of Experience '
STAN PROKOP 7 Park Avenue Financial/Copyright/2024
Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil