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Most small businesses experience cash flow problems from time to time and urgently need working capital.  Many business owners immediately think of the bank or loans when they’re short of money.

But there are other resources you can tap before you ask for that expensive overdraft or overdraft extension.  The money you need might already be there—locked up in inventory, assets or your debtors’ book.

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.

Good management

Even if the funds you free up from within your business are not sufficient, there is another payoff: the effort you make in searching for them helps to ensure that you are running your business in an efficient manner.

To free up funds from within your business, look closely at:

• assets
• customers
• suppliers

Assets

Your assets include debtors, stock, pre-paid expenses, vehicles, plant and equipment, fittings and property.  Each of these is a possible source of funds.

Debtors

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(s) are 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 serve as a free bank.

Here’s how you fix the problem:

• Get invoices out promptly.  Whatever else you do, become efficient at getting invoices out early.  This is your future cash flow—the lifeblood of your business!  You want to receive it as soon as possible . Start this new system NOW.  Depending on your business, you can often cut out statements simply by printing at the bottom of the invoice: ‘Please pay on this invoice as no statement will be sent.’
• Send the invoice with the goods or immediately the service is completed.  Date the invoice from no later than the day it is sent rather than following the standard ‘last day of the month’ date for invoices.  The earlier the invoice date, the better your chances of getting paid earlier.
• Change the terms for some of your customers, or for new customers.  For example, can you reduce ask for immediate settlement or set reduced payment terms such as 7 days or 14 days from date of invoice?
• Follow up promptly when invoices aren’t paid by due date.  This is critical.  Be polite but firm . If you haven’t the time to do this yourself, then appoint someone to do it for you.

Monitor your debtor collection days and set an improvement target each quarter.  For example, can you find out the benchmark standard for your industry?  Igf the average in your industry is 30 days, but you are taking an average of 45 days to collect outstanding debts, then there’s clearly room for improvement.  If your customers or clients have been taking advantage of you because of your previous laxity in invoicing, then you may need to re-educate them.  Do this politely so you don’t offend customers:

“Have you received our invoice, Peter?  I’m just checking that you’re happy with the goods/services we provided?  “We’ve got a new invoicing system going here, because we’ve been a bit lax in the past.  My accountant has set some tough goals for me to meet in reducing our average debt collection cycle, so if you could settle that invoice promptly I’d be most obliged.”

Consider factoring.  This simply means selling your outstanding invoices to a finance company. So instead of having to wait 30 days or more until an invoice is paid, you receive most of your money upfront from the finance company that then in turn collects the money from your customer.  The finance company will of course charge you a commission for this service.  Be aware, though, that there are pros and cons to factoring . For example, check that the finance company will not antagonise your customers with a heavy-handed approach.  Talk to them first about their collection methods.

Consider offering a discount for prompt payment.  If you’re going to pay a fee for factoring, why not try offering a discount to your customers instead?  Discounts are not a good option for low-margin businesses, but can be an option for high-margin operations.  You have to work out whether the use of money gained earlier is worth the discount you’re offering.  NEVER give the discount if the person has missed the due date for the discount offer.  (Yes, some will try this on.)

These are just suggestions and may not be suitable for your business.  Feel free to contact us about ways to find money in your business.

Check in next week for Part Two and more ways to find money within your business!