Below are some suggestions for unlocking funds without affecting your operational capacity. Keep in mind that you should always seek professional guidance before making changes to your business if you are unsure of the repercussions or potential issues.
Hidden sources of finance
Most business owners immediately think of the bank or loans when they’re short of money. But there are many more resources you can tap before you ask for that expensive overdraft or for an overdraft extension. You can often free up funds from within your business by re-examining your business systems, and these funds might in themselves be sufficient for your immediate needs.
To free up funds from within your business, you could look closely at the following.
Your assets include debtors, stock, pre-paid expenses, vehicles, plant and equipment, fittings and property. Each of these is a possible source of funds.
Are you letting some customers have the free use of your money for months? This is a common occurrence in small businesses where the owner is so busy getting the business off the ground, products out the door, or services completed that they don’t pay enough attention to basic business procedures. Many customers will take advantage of this ‘free money’. But your business is not to be a free bank.
Here’s how you fix the problem.
Do you have excessive capital tied up in stock? This can occur in two ways:
You need to regularly review your stock levels, your stock turnover rates and your purchasing policies. Can you free up money by reducing stock? What about moving out of the slow-moving lines or having a quick sale of the slow-moving stock? It might pay you to reduce some items quite heavily to get some money in quickly.
Can you approach suppliers to take back some excessive stock you may have ordered? They might help you out of a temporary tight corner as a goodwill gesture if you explain you have a temporary cash flow crisis but that you do wish to build a long-term relationship with them.
If you need additional funds to purchase more stock, make sure you’re replacing slow-moving stock with the faster-selling lines.
This is another area you could look at. These pre-paid expenses often relate to services. For example, you might have always paid your insurance bill for the year all in one hit, but could you instead arrange to pay small monthly amounts? There might be an additional cost for doing this, but you must weigh the extra cost against the advantages of 12 small payments that your cash flow can comfortably handle versus one large annual payment. Then approach your accountant. Instead of facing a substantial bill once a year, ask if you can pay a set amount monthly.
The same goes for your electricity bills. Ask if you can average out your electricity bills, instead of paying relatively small bills in summer and being hit by big ones in winter. Watch out for automatic payments too (telephone and electricity bills, etc.). These can often throw out your cash flow projections because you’ve forgotten to include them in your cash flow forecasts.
Fixed assets can often be the source of a significant amount of cash. Do you really put all your assets to full use? You might be able to sell off little-used assets and hire suitable replacements when you require them. You might be able to sell vehicles and lease others instead.
Finally, consider your suppliers as a possible source of funds. Ask for extended payment terms to give you the opportunity to sell the goods first before you have to pay. If the supplier won’t budge, try splitting the order in two and offer to pay normal credit terms (30 days) on one half of the order and 90 days on the other half. Your suppliers will be more likely to agree to this kind of arrangement if you’ve paid them promptly in the past.
Don’t forget that your customers can be a source of business funds. In addition to the good debt collection tactics already discussed, consider the following tactics.