Leveraging your finances when you have none

Cash is king in business. Without it you can't pay your bills or reward yourself for your efforts. We can sometimes get caught in the trap where the only way to get money is to sell more or see the bank manager to increase the overdraft limit, when in actual fact there may be funds available to you in places you haven't yet looked.

Debtors

Getting your debtors to pay on time is one of the quickest ways to provide your business with additional cash funds.

Informal trading arrangements can be good for customer relationships, but they rarely enhance customer payment promptness.  The best way to build an expectation of payment from customers is to draw up formal "Terms of Trade" which would typically identify what the required payment date will be, and what will happen in the event of non-payment by that date.  It is important that you obtain your customer's agreement to the terms before any future trading commences to ensure the terms are enforceable. 

Regular follow-up phone calls on overdue accounts, appropriate to you business, are also essential to achieve timely payment.  End each phone call with a conclusion: who will do what, and when.

Effective credit management requires a systematic, escalating approach, including use of a diary system, debtor's notes and potentially a credit collection agency.

Deposits are a way of reducing your tied up resources.  Obtaining a deposit on large orders can be used to alleviate any pressure being applied from a related supplier.

Factoring is a mechanism whereby a finance company or bank will lend you money, secured against your debtors.  This can provide much needed funds to a developing business that may not have the necessary assets to obtain finance elsewhere.

Creditors

Have you ever been called by a supplier because you missed the invoice payment deadline again?  It might be time to discuss the possibility of extended terms with your suppliers.  Be realistic in the timeframes you feel it would be possible for your business to make the payment.  A supplier might consider extended terms in return for certainty of payment.

If you are in an industry where your debtors are typically slow paying, you may be able to come to an agreement with your supplier regarding matching debtors' receipts to payments to them.  This is generally only possible where an excellent relationship already exists, although again a supplier might consider extended terms in return for certainty of payment.

Both of the above methods can provide more working capital for you to build your business or serve the more demanding financiers.

Instalment arrangements

If you have a creditor through whom you put a large quantity of business, or have exclusive supply rights to you, they may be open to instalment arrangements on your account with them.  Rather than pay invoices in one lump sum, they could be cleared over a series of weeks or months in agreed instalments. 

This reduces the number of large payments going out and may provide extended terms to your business, and could provide more certainty for your supplier as well as cementing the relationship further.

Credit Cards

Most credit cards will provide you with at least 50 days free credit, as long as you pay off the balance each month.  As long as you manage your bank accounts well, this can reduce your interest costs as well as providing a source of additional working capital.

Stock

If you are in overdraft or paying interest on funds obtained to enable you to buy stock, then that stock is getting more expensive, consequently reducing your margins every day that it sits there as the interest cost increases.

Japanese motor vehicle manufacturers revolutionised production processes with "Just In Time" inventory management.  This means that stock arrives as it is needed, reducing warehousing costs and money tied up in stock sitting on the shelf. 

It is important to regularly rationalise your stock to ensure you aren't stockpiling unnecessarily, as well as reviewing your procedures to ensure that stock is held for as short a period of time as possible.

Effective stock management will reduce the working capital you have tied up in inventory, releasing funds for use elsewhere.

Fixed Assets

If your business is asset intensive and has significant funds invested in capital assets, then a leasing arrangement may be a viable option for you.

There are finance companies that are willing to buy your assets off you and lease them back to you, either as a finance or operating lease. This can free up the funds that you have tied to the assets. 

Loan Terms

Banks are generally open to negotiation in relation to the financing they provide to your business. There may be potential to:

• Extend the term of a loan to reduce size of the repayments;
• Fix interest rates, which are generally lower than floating rates, so a fixed interest arrangement may enable you to reduce the size of the payments to the bank;
• If your business is always in overdraft, you may be able to put a portion of the overdraft in to a term loan.  This will enable you to tap in to the lower rates afforded to term loans rather than your overdraft rate which would tend to be higher.

Conclusion

The most important aspect of freeing up funds that are effectively already in your business is to ensure sustainability of your financial position.  Sensible businesses require sensible use of resources.  Are you utilising your resources effectively?