A lack of cash can not only stall your company’s growth but also place its very existence under threat.
You might think you’re immune from danger because your business is experiencing a high level of growth. Unfortunately, you’re wrong: expansion can exacerbate the problems caused by poor cash flow management. You almost always have to make investments and bring certain expenses on ahead of achieving the higher revenue and cash flow that comes with successful growth.
It is the oxygen every business needs to survive. The stark truth is, without cash your business will be unable to meet its payroll obligations, default on payments to suppliers and creditors (payables), and ultimately cease trading.
Fortunately, there are ways to find cash both from within your business and from traditional and alternative external funding sources.
Look within your company first
While many business owners automatically look to external funding sources, it pays to look closer to home first.
Most entrepreneurs don’t realise there is often considerable funding to support growth from within their own business. That’s because the collection of customer receivables can often be improved through strong credit control and the level of stock holding reduced through improved systems and processes. In some instances, poor negotiation of supplier payment terms means fewer funds are available within the business to support scaling up.
So before you pick up the phone (or click your mouse) to apply for external funding, consider the following methods for freeing up cash within your business.
If the business has the machinery, equipment or large amounts of stock that is idle, consider selling it or renting it to other businesses.
Remove unnecessary overheads
Look at all your overheads to see if they can be lowered. For example, consider reducing staff numbers, or not replacing employees when they leave or moving premises to get a more favourable lease. Review the effectiveness of your marketing and advertising spend as well as your insurance premiums, power arrangements and telecommunications.
Negotiate better terms with vendors
Ask for more favourable payment terms from your suppliers. This doesn’t necessarily mean asking for reduced prices but could be as simple as requesting an extra seven days for your payment window, or seeking free freight on minimum purchase volumes.
If your suppliers refuse your request, look for other suppliers who can offer lower prices or better payment terms for the same quality of the product.
Resolve late payment issues
Make your payment terms clear to minimise the possibility of late payment issues. Try to keep to the same terms for all your customers (for example, a 30-day window for payment of the invoice). The exception may be historically poor payers that are placed on COD terms. Get agreement to your payment terms from all your customers or clients. Carry out credit checks on all new customers or clients. Ensure that invoices are issued promptly. Ideally, you should issue invoices by email on the day of completion of the job or project and ensure that overdue payments are pursued.
Get deposits for large projects or orders. Build a deposit (of anywhere up to 50% of the total cost) into your contract for large projects or orders. This is especially important if the projects or orders are likely to involve a lot of resources and time.
That way if the customer decides to cancel the project or fails to pay the balance on the project or order, you have at least recovered some of the cost of the resources and time you’ve already invested in it.
Look for external funding
You should also consider external funding sources to help ease your cash flow challenges. There are a dizzying number of sources to consider, both traditional and alternative.
Apply for a bank overdraft
A bank overdraft has been the traditional form of funding for many businesses. But these days, banks are more likely to try to steer their clients to other forms of debt.
Request a bank loan
The advantage of bank loans is that they are for a set term with regular repayments. Banks also can’t call the money back on demand. The downside is that banks will demand strong security for the loan. For example, a personal guarantee secured on the assets of the business or even the owner’s personal assets.
Use asset financing
Using your assets as collateral for the loan is one of the easiest ways your growing business can get access to quick cash. However, there is a drawback: not all assets are considered equal.
Typically, lenders will only consider assets that they can sell quickly if you default on the loan. Therefore, they usually want high-value assets with a low depreciation rate or high appreciation rate, and which are easy to convert into cash.
Get alternative financing
The alternative finance market includes a wide variety of financing models. These include peer-to-peer lending, crowdfunding and specialist finance providers. Products such as selective invoice finance and invoice trading platforms are offered.
The benefit is that since they have greater flexibility than traditional funding sources they can often offer a faster turnaround on the right deals.
The advantage of invoice discounting, in which banks and invoice discounting companies lend money secured against your debtors/receivables, is that you can borrow up to 80-90% of the invoice amount within 24 hours. So you get the cash flow benefit and the rest when the money is collected.
The disadvantage is that it can cost more than overdraft or loan charges. Therefore, a bigger impact on your profit margins.
Peer-to-peer (P2P) lending
P2P platforms match lenders directly with borrowers so that you can borrow money from individuals. The huge benefit of this is that the rates are favourable and often much better than any other type of lending method. The disadvantage is that you will still have to undergo a credit check and possibly pay an application fee.
People come together on crowdfunding websites to pool money towards a particular venture or idea. In return, they receive an equity share in your business. The issue with crowdfunding is that it’s not as easy as some people make it out to be. It requires months of planning and lots of marketing in order to get people excited enough to contribute money towards it. There’s also the risk that you don’t receive the amount you’re seeking. In which case, any finance that has been pledged will usually be returned to your investors, and you will receive nothing. If you’re successful, there’s the risk you give away too much control in your company. This could have an impact later when you decide to sell the company.
The easy way to raise cash
The finding or raising of cash can be a much easier process by engaging the services of a part-time CFO. For example, The CFO Centre offer the services of part-time CFOs with big business experience. Their knowledge helps you uncover or obtain the cash you need to help your company achieve rapid, yet sustainable growth. They will help remove the fear and confusion from the entire process.
To discover how the CFO Centre will help your company to get cash and scale-up, please contact us here