Now that the worst of the Global Financial Crisis is probably behind us, many business owners have changed their focus from survival to growth. This growth has funding implications as businesses generally will have to invest in additional inventory and receivables.
Many businesses who have just managed to survive the recession are now facing the daunting prospect of funding the recovery. Typically, the obvious candidates go broke early on in any recession with many fragile businesses surviving based on the banks not willing to take action. Now, with the recovery underway the weaker businesses will struggle to access finance.
The better capitalized companies may have invested in equipment and people during the recession and now are well placed to strengthen their market position. These companies are likely to be acquirers over the next period. If the gap between your business and the market leader is becoming too great, it may be time to exit or change your focus.
The traditional sources of external finance are debt (bank, factoring and leasing) and equity (family/friends, angel investors, private equity and the public market). The recession has not only damaged the balance sheets of the banks, many of the niche financiers have gone out of business. In these capital constrained times, banks have a limited amount to lend, so only the best funding opportunities will be successful. As the rules have changed, don’t assume that the ratios and costs that the banks previously applied are still relevant.
If you are considering taking in an external shareholder, make sure that you are Investment Ready before you approach investors. Consider where your business fits now as an attractive investment opportunity, then look to where your business needs to be to make it more attractive and then how you are going to make it happen. Your business advisor can assist you in the process.
The best and generally cheapest source of finance for business already exists on their balance sheet in the form of lazy working capital. Working capital is the amount of inventory and receivables less payables.
6 tips for reducing your working capital
- What gets measured gets done – make sure you are monitoring the level of working capital in your business and take action when it blows out.
- A sale cost money until it is collected – focus on the payment terms with your customers and watch for slippage in payments – do not let yourself become your customers bank as we have noticed that many larger companies are now paying their suppliers later.
- Some customers are not worth it – a low profitability customer who pays you late may not be worth servicing.
- Do unto others – seek to get extended payment terms from your suppliers.
- Reduce your inventory – implement a more effective inventory control system to reduce the level of funds tied up in the warehouse and cull low profitability and non-core product lines.
- Invoice more frequently – especially for professional services firms seek to reduce the level of work in progress by invoicing your clients more frequently and remember the cliché bill early and bill often.
Now is the time for businesses to remain focused and ensure they are operating efficiently, delivering value to their customers and making the most of their limited capital base.