Internal Sources of Cash
Internal Sources of Cash
The first place to look for cash is inside your own business. If it's available here, there are typically fewer strings attached to it than if it versus external sources. Cash can be found inside your business in a variety of places.
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 four basic ways you can increase your profit.
Increase your total number of sales (this is also addressed in the Sales).
Increase the size of each individual sale (this is addressed in the Sales).
Raise your prices. Unless your customers are particularly price sensitive, chances are you could 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 (this will be addressed in more detail in the upcoming chapter on “Pricing”).
Lower your expenses.
a. Buy for quality and properly maintain your supplies — When things are taken care of, they need to be repaired and replaced less often.
b. 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 price.
c. 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.
d. 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.
e. 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.
f. Watch your payroll costs — This is typically one of the largest business expense 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 percent 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.
Consider the ideas for increasing your profit margins listed above, and then develop a list of your own in the space below. We'll use this list when designing your Financing Systems.
Other Internal Sources of Cash
Profit is not the only internal source of cash for your business. Cash may be found in various other places as well. Some are temporary sources that will need to be paid back at some point in the future. Others are more permanent. Following is a list of examples. As you read through them, think of how they might apply to your business.
- 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.
a. 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.
b. Sell and outsource asset use — Sometimes it's more cost effective to outsource the use of an asset rather than do it yourself. A bakery, for example, may wish to sell off an oven that is used only occasionally and outsource the baking of certain specialty items.
c. 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.
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.
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.
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.
You will definitely not want to make a habit of paying your bills after they are due and in some cases it may be prudent to pay them upon receipt. Especially if you are dealing with a smaller company with cash flow concerns of their own. Keep in mind that your relationship with your suppliers may be more important than a temporary increase in your cash flow.
- 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. Following are some ideas for putting some of this cash into your hands.
a. Take a deposit — Cash up front is an effective way of directly funding your immediate needs.
b. Shorten the payment period — If your payables are due in 30 days, you could reduce it to 20 or even 15 days.
c. Encourage early payment — Many companies offer an incentive to their customers pay their bills right away. A common set of terms is to offer a 2% discount fo payment within 10 days with the total due within 30 days. This is typically written on the invoice as follows “2/10 net/30.”
d. Collect on overdue accounts by designing a Collections System — This will keep overdue accounts from falling through the cracks, which can easily happen when things get busy.
e. Decrease the number of bad debts you write off — Design a Credit System that checks for past problems and establishes credit limits.
f. Sell your bad debt — If you have trouble collecting on certain accounts, debt collection companies will take them off your hands for a percentage of the value of the invoice. Documentation is extremely important here.
g. Sell your receivables — There are also companies that will purchase your receivables at a discounted rate. So if it is worth it to you to have immediate access to your money, you might consider this option. Just like selling your bad debt, accurate documentation is very important for this to work properly.
Consider the other internal sources of cash listed above, and then develop a list of your own in the space below. We'll use this list when designing your Financing Systems.
Awareness is the first step toward change, so if your employees are not aware of their impact on the company's cash flow, they will not be able to improve it. How might you improve your employees' awareness of their impact on the company's cash-flow?
Never underestimate the impact of your Corporate Culture. An environment that promotes the conservation of cash will have a greater impact on the “bottom line” than any list of rules.