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Maximizing working capital: How growing businesses can gain an edge in an uncertain economy

(BPT) – Businesses of all sizes, especially small and mid-size businesses, have faced a number of divergent economic headwinds since the onset of The Great Recession in late 2008. Chances are good that during that time, a business held on tightly to the cash it had, put its growth plans on hold or both.

Now that the economy is gaining stability, business owners might be asking themselves how to best manage their business finances for the future – ride out the recession or take advantage of an upswing?

The answer is simple: get a crystal clear view of both your cash position and your cash needs and manage them closely. Although it may sound complicated, small and mid-sized businesses can easily maximize cash through a combination of smart strategies and a dynamic checking account.

“Small and mid-sized businesses seeking to shore up their financial health and gain an advantage in this economy can best achieve these goals by maximizing their working capital,” says Bill Fink, executive vice president and chief lender for Regional Commercial Banking at TD Bank. “If there’s one area that businesses seem to be struggling with in this economy, it’s how to best manage and maximize the return on their cash. But you don’t necessarily need to have a CFO on staff to do it well. Sound cash management strategies and access to advanced payments and receivables services through TD Commercial Convenience Checking can provide an edge for any business owner.”

Before a business can reap the benefits inherent in identifying short-term funding gaps in working capital and long-term financing needs for growth, it needs to adhere to essential elements of cash management. A business owner should know when and why cash needs will occur and understand the full range of options for meeting cash needs, which likely include a combination of savings, financing and relying on trade credit terms.

There are two main strategies for business owners to get the most out of their working capital Fink says.

The first is to expedite receivable collections, putting cash back to work for the business, and allowing it to work for the maximum amount of time when measured against the accounts payable window. This gap provides a significant window of investment opportunity and is very similar to how a bank makes money.

The second strategy is to take full advantage of trade credit discounts. The available trade credit terms vary by industry, with many offering a discount from seller to buyer if payments from the seller are made promptly.

“For example, a trade credit agreement might allow for a 2 percent discount for a 10-day payment arrangement,” says Fink. This equates to an annualized interest rate of 72 percent on the trade discount – you save this effective interest rate by paying them early. If in this same instance, your business had a line of credit at today’s prime rate of 3.25 percent, you should take advantage of available trade credit discounts to realize significant savings, because the annual interest rate on the trade discount is higher than your cost of borrowing.”

Other avenues that are often overlooked by small and mid-sized business owners: the use of controlled disbursement services, implementation of zero balance accounts and utilizing the automated clearinghouse network for payments.

Once these strategies are implemented, the next step is to be sure the business has a commercial checking platform that meets the dynamic needs of the company. For businesses that require flexibility as they grow, TD Commercial Convenience Checking allows customers to select and pay for only the services they want, with the benefit of an Earnings Credit Rate that can help offset the cost of banking services. Account holders have access to several advanced payments and receivables services, including TD eTreasury, helping to run their business more effectively. Key features include 1,000 free transactions per statement cycle across the account relationship, and the ability to waive a monthly maintenance fee.

With strong cash management practices in place and a powerful but cost-effective commercial checking platform, small and mid-sized business owners will generate more cash, freeing up capital to support organic growth.

“To best maximize your working capital, implement sound cash management practices and be sure your checking account is robust enough to meet your firm’s changing needs as you grow,” says Fink.

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