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Cash Flow Q&A with Stan Prokop
1. Can you explain cash flow and why entrepreneurs struggle with this?
To say that entrepreneurs struggle with cash flow is a great understatement we think! Why? Simply because it’s difficult to understand and even more difficult to achieve, as thousands of business owners will attest! It is actually one of the most important terms in business and quite frankly is one of the most important concepts owners and managers need to understand.
Confusion reigns, we think, because the term means different things to different people. When businesses actually ‘generate ‘cash they are able to do important things – pay debt, take out dividends, buy equipment, and invest in R&D.
The struggle with the term also comes about because, mistakenly, business people think profits are cash. A good example might be a computer company that shows a year-end ‘profit ‘of, say 3 Million dollars. But if in the same year they spent millions in R&D, or a plant, they actually used cash, they didn’t produce any.
Every business has a 3 part financial statement. Most of us look at the balance sheet and income statement, when in fact part 3; the cash flow statement may in fact be the most important.
2. What are some solutions for business cash flow financing issues?
When we talk to clients about cash flow financing issues we focus in on whether the problem is a long-term solution, or simply an asset monetization challenge. The majority of our transactions are the monetization of assets into working capital and cash flow. Simply speaking, we put financing facilities into place to ‘cash flow ‘assets such as receivables, inventory, equipment, and even tax credits. These solutions might be one separate solution, or all of the above. The actual names of these solutions are receivable financing, inventory finance, supply chain financing (P.O. Finance), asset based lending, sale-leaseback, and finally SR&ED tax credit finance.
All of the above solutions bring cash to the balance sheet, but no debt as the assets being financed offset them.
3. What is receivable cash flow financing and when should a business owner consider this?
Receivable financing is probably the most common and achievable methods of cash flow financing. Companies bill their products and services, which alone can take some time. For decades the majority of businesses in Canada billed clients on 30-day terms. And then they got paid. Today, they still do that, but they don’t get paid, as typically many firms collect their accounts in 60 or 90 days. We won’t weigh in on bad collection policies, we will say though it’s a vicious circle, and all firms hold on to their money as long as they can.
Receivable financing works in the following manner – your company issues an invoice and then finances it the day it is issued. You receive cash the same day. You don’t wait 2-3 months. You then use that cash to buy more, sell more, and profit more. You can complete 3 sales and get paid instead of waiting for one sale to be paid 2-3 months from now.
We might add that many business people don’t understand that the cost of receivable finance, typically 2%, is something you are already incurring because you’ve become the bank for your clients for each sale as you wait for those 60-90 days collections to materialize.
4. How does a business owner avoid business operating cash flow problems?
The short answer is to slow down sales and collect all your monies promptly – you’ll never have another cash flow problem again! But most of our clients don’t seem to do that! Billing customers promptly and enforcing good collection procedures with your clients can avoid cash flow problems. We fully recognize the challenge of maintaining client goodwill but collecting your money at the same time. We know it’s not easy.
Because you do have money invested in receivables and inventory and pre paids you therefore need to have a finance mechanism for those assets. It’s either a bank line of credit (difficult for many to achieve) or receivable finance as we outlined.
5. Have you ever had a client use cash flow financing for their company? If so, how was their experience with it?
One of the best stores we can share is when we did a receivable and inventory financing for our client, a wholesaler to Dollar Stores. They had a 200k facility with the bank but were capped and not allowed to increase it. We put together a 2 Million dollar facility. The cost of 2% per month was offset by the client’s ability to purchase in bulk now and save 5% on all purchases. In effect he was making money on the cash flow financing, the 3% difference! And growing his business by millions of dollars. Not all firms can do this but they can increase cash flow and grow sales when a proper facility is put in place.
6. When should a business owner consider getting a cash flow loan?
There are only two times, yesterday when you needed it, or right now!
We don’t mean to be flippant but carefull planning around growth and cash flow makes or breaks any entrepreneurs business.
About Stan Prokop:
Stan Prokop is the founder of 7 Park Avenue Financial. The firm specializes in business financing for Canadian companies in the areas of working capital, asset based lending, SR & ED tax credit financing, equipment financing, and banking.
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Cash Flow Q&A with Stan Prokop
1. Can you explain cash flow and why entrepreneurs struggle with this?
To say that entrepreneurs struggle with cash flow is a great understatement we think! Why? Simply because it’s difficult to understand and even more difficult to achieve, as thousands of business owners will attest! It is actually one of the most important terms in business and quite frankly is one of the most important concepts owners and managers need to understand.
Confusion reigns, we think, because the term means different things to different people. When businesses actually ‘generate ‘cash they are able to do important things – pay debt, take out dividends, buy equipment, and invest in R&D.
The struggle with the term also comes about because, mistakenly, business people think profits are cash. A good example might be a computer company that shows a year-end ‘profit ‘of, say 3 Million dollars. But if in the same year they spent millions in R&D, or a plant, they actually used cash, they didn’t produce any.
Every business has a 3 part financial statement. Most of us look at the balance sheet and income statement, when in fact part 3; the cash flow statement may in fact be the most important.
2. What are some solutions for business cash flow financing issues?
When we talk to clients about cash flow financing issues we focus in on whether the problem is a long-term solution, or simply an asset monetization challenge. The majority of our transactions are the monetization of assets into working capital and cash flow. Simply speaking, we put financing facilities into place to ‘cash flow ‘assets such as receivables, inventory, equipment, and even tax credits. These solutions might be one separate solution, or all of the above. The actual names of these solutions are receivable financing, inventory finance, supply chain financing (P.O. Finance), asset based lending, sale-leaseback, and finally SR&ED tax credit finance.
All of the above solutions bring cash to the balance sheet, but no debt as the assets being financed offset them.
3. What is receivable cash flow financing and when should a business owner consider this?
Receivable financing is probably the most common and achievable methods of cash flow financing. Companies bill their products and services, which alone can take some time. For decades the majority of businesses in Canada billed clients on 30-day terms. And then they got paid. Today, they still do that, but they don’t get paid, as typically many firms collect their accounts in 60 or 90 days. We won’t weigh in on bad collection policies, we will say though it’s a vicious circle, and all firms hold on to their money as long as they can.
Receivable financing works in the following manner – your company issues an invoice and then finances it the day it is issued. You receive cash the same day. You don’t wait 2-3 months. You then use that cash to buy more, sell more, and profit more. You can complete 3 sales and get paid instead of waiting for one sale to be paid 2-3 months from now.
We might add that many business people don’t understand that the cost of receivable finance, typically 2%, is something you are already incurring because you’ve become the bank for your clients for each sale as you wait for those 60-90 days collections to materialize.
4. How does a business owner avoid business operating cash flow problems?
The short answer is to slow down sales and collect all your monies promptly – you’ll never have another cash flow problem again! But most of our clients don’t seem to do that! Billing customers promptly and enforcing good collection procedures with your clients can avoid cash flow problems. We fully recognize the challenge of maintaining client goodwill but collecting your money at the same time. We know it’s not easy.
Because you do have money invested in receivables and inventory and pre paids you therefore need to have a finance mechanism for those assets. It’s either a bank line of credit (difficult for many to achieve) or receivable finance as we outlined.
5. Have you ever had a client use cash flow financing for their company? If so, how was their experience with it?
One of the best stores we can share is when we did a receivable and inventory financing for our client, a wholesaler to Dollar Stores. They had a 200k facility with the bank but were capped and not allowed to increase it. We put together a 2 Million dollar facility. The cost of 2% per month was offset by the client’s ability to purchase in bulk now and save 5% on all purchases. In effect he was making money on the cash flow financing, the 3% difference! And growing his business by millions of dollars. Not all firms can do this but they can increase cash flow and grow sales when a proper facility is put in place.
6. When should a business owner consider getting a cash flow loan?
There are only two times, yesterday when you needed it, or right now!
We don’t mean to be flippant but carefull planning around growth and cash flow makes or breaks any entrepreneurs business.
About Stan Prokop:
Stan Prokop is the founder of 7 Park Avenue Financial. The firm specializes in business financing for Canadian companies in the areas of working capital, asset based lending, SR & ED tax credit financing, equipment financing, and banking.
