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How Canadian Businesses Can Use Working Capital To Fuel Growth

12/16/2015 02:30 EST | Updated 12/16/2016 05:12 EST
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Like a plant needs water, every business requires a great deal of working capital to grow. However, getting access to capital has historically been a problem for small- and medium-sized businesses in Canada.

Since banks and other lending organizations don't always show the same enthusiasm for a business' expansion plans as the company itself, often SMBs have to be resourceful in order to create the cash flow necessary to fuel growth.

To capitalize on the next big opportunity the market affords, forward-thinking businesses must recognize that how they manage their capital today will define their competitive position tomorrow. Here's how Canadian companies can use smart cash flow management to fund their growth and build a competitive advantage:

Step 1: Develop Accurate Forecasts

Accurately tracking funds and collecting on accounts receivable is an obvious first step. It's common for mid-size companies to underestimate the importance of developing accurate forecasts of their working capital cycles, but addressing these issues is critical -- and doubly so for businesses looking to scale.

For instance, while an American supplier will usually give you 30 days to make payment, an overseas supplier might want to be paid in a shorter timeframe. And when collecting receivables, enterprise customers often can take up to 90 days or longer to pay. The result is a fluctuation in working capital, which could severely hamstring your company's ability to capitalize on time-sensitive opportunities.

To create extra cash flow, businesses should also consider a payment solution that extends payment cycles. This can help you avoid overcharges and reduce costs, both critical factors for creating accurate and reliable working capital forecasts.

Step 2: Restructure Payables and Receivables

Your business should re-examine how it's distributing payments to merchants and vendors. Prioritizing them by due dates and interest rates and structuring your payables accordingly can add flexibility to your cash flow. Also think about utilizing a program or service to help your accounts payable department make the process more efficient.

Finally, make an effort to invoice quickly when pursuing receivables, and consider offering incentives for faster payment. Be cautious, however. For companies with small margins, discounts for early payment may not make sense. Make sure your margin can cover it.

Step 3: Create a Mutually Beneficial Relationship with Suppliers

Taking advantage of available credit is an excellent way for your business to take greater control over your accounts payable, maintain liquidity and improve cash flow without negatively impacting your relationships with banks, lenders and suppliers.

Here's how it typically works. As soon as goods and services have been delivered and your business has received an invoice, you can use a payment solution like American Express to settle up with your supplier. Not only will making quick payments strengthen your relationship with your supply chain, you will then receive an additional 58 days (or more, depending on the date the supplier submits the charge) to settle the payment.

Essentially, this gives your business access to an alternative funding source that allows you to cover your payables while improving operational cash flow. And suppliers get paid sooner, so it's a win-win.

Also, when financing through a payment solution, businesses can often decrease what they're borrowing from their main lender, leaving their main line of credit untouched and available for other key initiatives.

By following these three simple steps, you might be surprised by how much additional cash flow you can create for your business. Organizations that focus on improving working capital can almost immediately lower borrowings, boost customer service levels and supplier relationships, increase profitability and most importantly -- free up cash for new initiatives/projects.

Make no mistake, working capital is a competitive advantage that all Canadian businesses should be looking to capitalize on.

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