Find immediate opportunities in your business to save cash.
When times are tough, your business needs cash for survival. When times are good, you need cash for growth. Because cash is such an essential resource for your business, it’s important to know where to find more of it before you need it. If you wait to find financial resources until the cash flow is needed, it may be too late. This doesn’t mean that you need to keep large cash reserves sitting in a vault someplace, but it does mean that you need access to cash at all times.
Cash can be generated either inside your business from internal sources (from profits, for example) or outside your business from external resources (from investors, for example). If you can find cash within your own business there are typically fewer strings attached compared to external resources.
Profit as a Source of Cash
Your best source of new cash is profit, so naturally one of the best ways to get more cash is to earn more profit. There are a few basic ways to increase your profit:
1. Increase your total number of sales
2. Increase the size of each individual sale
3. Raise your prices
Unless your customers are particularly price sensitive, chances are you can raise your prices a small amount without a significant loss in sales volume. The trick, of course, is how much. But even a small price increase can have a greater impact on your profits than you might imagine.
Another way to increase your profit is to lower your expenses. This can be done in a number of ways:
1. Buy for quality and properly maintain your supplies. When things are taken care of, they need to be repaired and replaced less often.
2. Buy cheaper. Search for the best price (without impacting your minimum standards for quality) and ask your suppliers for discounts. If you are a longtime customer or if you purchase in quantity, suppliers will often give you a preferred customer rate.
3. Cut costs, reduce waste and increase efficiency. Something as simple as turning off unneeded lights, for example, will have an effect on the bottom line. A penny saved really is a penny earned.
4. Maintain your equipment. Repairing and replacing worn out equipment can absorb a lot of cash. Properly maintain your equipment to keep it in top-notch condition for as long as possible.
5. Rent or lease instead of buying. It’s not always necessary, or even wise, to tie your cash up in your assets. Renting or leasing seldom-used equipment, for example, often makes more sense than purchasing it.
6. Watch your payroll costs. This is typically one of the largest business expenses and the easiest place to overspend. When considering the value and expense of an employee, remember to take into account the extra employee costs, such as cash bonuses, overtime wages, medical and dental insurance, staff discounts, and so on. These extras add up. In fact, the average “extra” cost of an employee is 35% of his or her salary. By no means should you pay your people less than they’re worth. However, every employee should add measurable value to your business. If they don’t, something needs to change. Be giving where you can, but expect results in return. Remember, no one wins if the business fails.
Profit is not the only internal source of cash for your business. Cash may be found in various other places as well:
1. Fixed Assets. Cash that is tied up in assets can sometimes be more effectively utilized elsewhere. You can free all or some of this cash in the following three ways:
Sell assets — If you don’t need an asset (such as an extra vehicle) you can sell it outright and convert it back into cash.
Sell and outsource asset use — Sometimes it’s more cost effective to outsource the use of an asset. A bakery, for example, may wish to sell off an oven that is only used occasionally and outsource the baking of certain specialty items.
Sell and rent or lease back assets as necessary — This allows you to take back most of the cash tied up in the asset without losing the use of it. Property is a common example, but this can be done with almost any asset.
2. Clean out your inventory. Liquidate obsolete or slow-moving merchandise that tie up cash unnecessarily. It’s typically more efficient to purchase these things when they are required rather than to tie up cash and storage space by storing them.
3. Minimize your inventory. Monitor your inventory and keep it to a minimum. This way you can avoid unnecessarily tying cash up in inventory. If this is an issue for you, identify your current inventory turnover, then work to make it as high as practical.
4. Accounts Payable. If you hold off on paying your bills until they are due, you can temporarily conserve your cash for other purposes. If your payables are due in 30 days, for example, it’s like getting a 30-day, interest-free loan from your suppliers.
5. Accounts Receivable. When you extend credit to your customers, you are essentially making them an interest-free loan. This is one more place that your cash can get tied up when it could be better utilized someplace else. Getting cash up front or taking a deposit is the most effective way to directly fund your immediate needs. Another tactic is to shorten the payment period. If your payables are due 30 days, you could reduce it to 20 or even 15 days. Many companies offer an incentive to their customers who pay their bills right away. A common set of terms is to offer a 2% discount for payment within 10 days. Be sure to collect on overdue accounts by designing a collections system. This will keep overdue accounts from falling through the cracks, which can happen easily when things get busy.
The ultimate purpose of your business development work is to give you the power to build your business as you envision it. Financial management puts you in the driver’s seat, giving you control over this significant aspect of your business. Of course, money is not the only measure of success, but it is an important one. After all, without it you would have no business at all.
Implementing these options gives you the potential to immediately increase your business’ profit margins. With very little turnaround time you can save money and provide your business with ready cash. By tapping into these internal sources of cash, you will place your company in a better position to successfully weather the tough times and maximize its growth in the good times.