The Science And Fiction Of Working Capital

OVERVIEW – Information on working capital management in Canada . Understanding cash flow finance for management of assets and financing solutions just got easier

Working capital management
in Canada should be a priority for Canadian business owners and financial managers. So when it comes to understanding cash flow finance we maintain it’s a bit of a science (or art?) and there’s a bit of fiction or fallacy in some of the information out there. Need clarification? Let’s dig n.

As a business the levels of your ‘ working capital ‘ determines the amount of cash you will need and use in your day to day operations and growth plans.
We are always somewhat amused at the ‘ textbook ‘ definition of working capital, which maintains that if your current assets such as accounts receivable and inventory are ok to be converted to cash within a year you have… you got it… working capital. Another fallacy, it seems to us at least, is that the larger current ratio is desirable.

In our words those last two points are a bit of the ‘ fiction ‘ we’re talking about. Why? Simply because in the real world (that’s where we work everyday) asset turnover needs to happen with a lot more emphasis than a 1 year timeframe. Furthermore, if you delve deeply into the text book definition of current ratio liquidity you just might find that great current ratio your accountant, or banker, maintains you have simply masks poor turnover of inventories and slow or uncollectible A/R.

The best way to determine if your working capital is ‘ working ‘ is to take a close look at your operating cycle. That’s the time it takes for 1$ to flow through your company from the point of taking an order to collecting cash

Since working capital management is all about paying and reducing accounts payable any current assets that can’t always cover payables in their turnover must be financed.

Ways to finance working capital cash flow needs? They include:

Bank lines of credit
Non bank asset based lines of credit facilities
Accounts Receivable Financing
Inventory Financing
PO Financing
Tax credit monetization of SR&ED Receivables
Working Capital term loans

In all cases except for the above mentioned working capital term loans you are not taking on debt, you’re just monetizing assets.

Always track the level of current and projected sales in relation to your cash flow and working capital needs. Sales are not ‘ gratis’ – they have costs associated with them, and remember that profit does NOT equal cash on hand.

If you’re looking for cash flow finance solutions and management tips seek out and speak to a trusted, credible and experienced Canadian business Financing Advisor with a track record of success who can assist you in sorting out the fact and fiction of working capital management and finance.

Author: Stan Prokop – founder of 7 Park Avenue Financial

Originating business financing for Canadian companies, specializing in working capital, cash flow, and asset based financing. In business 10 years – has completed in excess of $90 Million of financing for Canadian corporations. Core competencies include receivables financing, asset based lending, working capital, equipment finance, franchise finance and tax credit financing.
Info re: Canadian business financing & contact details:


Greg LaBella
7 Park Avenue Financial
Off.   905 829 2653

Cell   905 302 4171

7 Park Avenue Financial
Canadian Business Financing