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Working capital is the backbone of any business, so learning how to maintain or generate more cash in your company is vital to succeed today. "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 BDC Area Manager Marie-Claude Provost.
Depleting your working capital can also diminish your capacity to exploit new business opportunities, she adds. "For instance, 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," she emphasizes.
Ultimately, keeping sufficient working capital on hand can be a major challenge for cash-strapped entrepreneurs. However, Provost recommends a few tried-and-tested ways of increasing your operating cash.
Avoid financing fixed assets with working capital
Provost highly recommends that entrepreneurs avoid 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. "You may lose their confidence that you're running a healthy company."
As an alternative, a long-term loan enables SMEs to breathe easily and pay for assets systematically at a set pace. "You can also easily recuperate the costs of interest on a long-term loan. For example, 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
Provost 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. "For instance, if you have a list of clients, you can only change them into real accounts receivables if you can afford the inventory to sell to them," she points out. "It's basic business know-how." Entrepreneurs can also recuperate the costs of loans, for example, through increased revenues.
BDC can provide long-term financing for increased inventory or other fixed assets, market development or ebusiness initiatives, just to name a few. In addition, BDC can arrange repayment schedules to help entrepreneurs keep as much working capital available as possible.
Refinance your fixed assets
Entrepreneurs can also consider refinancing their 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." Once again, 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 small and medium sized businesses is to make personal investments in order to increase working capital. "You'll first need to do a cost and benefits analysis to see what return you will get on your investment," she explains. "This is a viable strategy if you see that the pay-off in your business outweighs personal losses," she adds.
Get external advice
It's not always easy for entrepreneurs to see how they can improve their cash flow, so Provost recommends that business owners seek outside help. BDC can look at your company's current financial structure and provide basic advice on improving cash flow and identifying the possible options. Or you might consider discussing your needs with BDC Consulting. "If you're doing strategic planning for your business, you'll likely be looking at your financing strategies as well," she concludes.
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