THUNDER BAY – Business – BDC Perspective: Working capital is the backbone of any business, so learning how to maintain or generate more cash in your company is vital to success. “It’s basically the cash you need to operate, or your current assets minus your current liabilities. Without enough working capital, you could lose your flexibility and credibility with financial institutions, suppliers and customers,” says Erin Laine, account manager at BDC.
BDC Perspective: How to increase your working capital
Depleting your working capital can also diminish your capacity to exploit new business opportunities. For example, Laine says, “if your competition suddenly closes up shop and you need more inventory to service their customers, you would need working capital to buy that additional inventory. Without it, you’re unable to react quickly.”
Keeping sufficient working capital on hand can be a major challenge for cash-strapped entrepreneurs, so remember the basics.
Collect payments faster
Collecting payments from customers faster is an obvious route to keeping more working capital in your company. To help protect yourself from late payments, she recommends billing as early as possible. “You don’t have to wait until the end of the month. That’s a common fallacy. You need to generate an invoice as soon as the goods or services are delivered.”
Avoid financing fixed assets with working capital
Laine discourages entrepreneurs from depleting their working capital to finance fixed assets such as equipment. “A lot of small businesses tend to use cash to pay their debts. It’s an old mentality. In the end, you would be better off using long-term loans to pay for fixed assets,” she says.When business owners use up all of their cash, they also look more risky to financial institutions.
As an alternative, a long-term loan enables small and medium-sized enterprises to breathe easily and pay for assets at a set pace. If you keep a good cash flow and are able to pay your suppliers quickly, you’re more likely to be able to secure discounts. In turn, these discounts can partially pay the interest on your loan. Eventually, you’ll get the cost of the loan back,” she emphasizes.
Borrow to increase your working capital
Laine contends that taking on long-term debt for working capital also pays off. “You can’t grow your business and increase your profits if you’re not investing in your company,” she says. BDC can provide long-term financing for a variety of expenses, including increased inventory or other fixed assets, market development and e-business initiatives and can arrange repayment schedules to help business owners keep as much working capital available as possible.
Refinance your fixed assets
Entrepreneurs can also consider refinancing fixed assets such as equipment in order to generate working capital. “Basically, you’re leveraging your assets and turning them into the cash that you need,” says Laine. Business owners can benefit from the extra working capital to improve their plant layout, pursue new export markets or align their HR strategies.
Make a personal investment
Another option for SMEs is to make personal investments to increase working capital. “You’ll first need to do a cost/benefit analysis to see what return you will get on your investment,” she explains. “This is a viable strategy if you see that the payoff in your business outweighs personal losses.”
Get external advice
It’s not always easy for entrepreneurs to see how they can improve their cash flow, so Laine recommends that business owners seek outside help. “At BDC, we can help entrepreneurs do a thorough assessment and look at key areas such as their sales cycle, inventory turnover and credit terms for suppliers and customers,” says Laine. “One of the first things I do with clients is help them see where they could improve and find ways to generate more cash internally.”
The Business Development Bank of Canada is passionate about one thing: entrepreneurs. Helping them is our raison d’être. BDC listens and knows how to meet their needs. We have business relationships with 29,000 entrepreneurs across Canada. We understand the challenges they face every day, and we use our human and financial capital to provide the means to reach their aspirations. At BDC, we do everything to help entrepreneurs grow their business. BDC offers financing, venture capital and consulting services. BDC focuses on small and medium-sized enterprises (SMEs).
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