How to Find Cash and What To Do With It
Like a mirage in the desert, outstanding accounts receivable can lie just beyond the reach of you, the cash-strapped business owner. Except this is not a mirage—it’s real money that belongs to you, is earned by you, but very much out of reach until your customer decides to pay you.
How can you release this trapped cash and put it to good use where and when you need it for your business? The quickest and most effective way is to factor or finance your accounts receivable by selling them at a discount to a commercial finance company. This will enable you to replace your accounts receivable with cash in hand and could make a drastic difference to the way you run your business.
However, once you release this money, there’s no point in letting it sit idle in a bank account. This new cash is “working capital” and it literally has to be put to work. Make sure you have enough on hand at all times to cover immediate operating expenses. But once you have built up excess cash then you can begin to spend it.
Following are some recommended uses for this extra cash, in order of importance:
1. Pay past due taxes. Negotiate a repayment plan on any past due taxes and always stay current on every level of tax. Penalties, interest and the extra scrutiny you will attract make this an extremely expensive and dangerous source of working capital.
2. Pay past due accounts payable. Supplier credit is your best source of working capital and you need to treat it as such. Since there is no interest, no collateral and no personal guarantees you simply cannot do better than that. Strive to build strong relationships with your suppliers by paying on time, but first remit all past due balances immediately. Then whenever possible take advantage of early pay discounts. Not only do these discounts go directly to the bottom line but, over time, you will earn the title of “preferred customer” which is a very good position to be in with many perks and benefits.
3. Increase sales. Perhaps you could use some extra cash to hire a well-trained salesperson or two and increase sales quickly. Paying a good commission faster than your competitors will help you to attract and retain the best and most qualified salespeople. You might also consider investing in better marketing materials that will help to increase sales over time.
4. Build inventory—carefully. It is important to deliver product in a timely manner, but inventory is another common place that ties up valuable working capital. Stock only what you deem necessary to have on hand and work toward a more fluid inventory management system. If product is not moving, then consider discounting it to get it off your shelves.
5. Lower operating costs. Streamlining operations to lower overhead is always a good use of funds. Improving accounting and other reporting processes will give management access to timely information and ultimately saving the company money in a variety of different ways.
6. Upgrade equipment. Equipment and technology upgrades that will lower costs and/or improve the quality of your product or service can be a very smart use of cash. Having cash on hand can help you when negotiating with equipment vendors or lease companies. It may enable you to buy used and/or enter into more favorable financing terms.
7. Purchase your own facilities. This should be a long-term goal for every company. Not only can you lower costs and improve efficiencies, but companies that own their facilities and have good credit ratings are far more likely to obtain and take advantage of favorable bank financing.
Now and for the foreseeable future it will be difficult to deal with bankers and venture capitalists. However, through factoring and accounts receivable financing, you can free up the hidden cash in your company and put it to productive use within your business.
Tom Klausen is the Senior Vice President of First Vancouver Finance (FVF), which has offices in Vancouver, BC and Toronto, ON. FVF provides creative financing solutions to small and medium-sized businesses across Canada. Tom has worked in the alternative lending industry for more than 25 years and consults with businesses struggling to obtain traditional financing. You can reach him at TKlausen@FVF.ca or visit http://www.FVF.ca
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