Many business owners who are unable to access money in terms of debt or equity capital may be forced to reassess their needs, resources, and business management. For example, quick handling of accounts receivable, effective inventory control, customer prepayments, and cutting down on unnecessary expenses can free up funds not otherwise available. It forces your business to operate in a more efficient fashion. This will lessen your need to look outside the business for financing. Some of the various methods of internal financing include the following:
Customer prepayments
A business can encourage customers to make a deposit, prepayment, or payment on delivery. This is a very common technique in the mail-order business and in service-type businesses.
Inventory control
Effective inventory control will ensure there is the right amount of stock to satisfy customer demand. Determine guidelines for proper inventory purchases. Adjust your purchases to meet the peaks and valleys of your annual business sales. Too much money tied up in slow-moving inventory, debt servicing payments on inventory loans, and lost customer loyalty due to insufficient stock is costly to your business.
Collecting receivables
Receivables can be reduced by tighter credit-granting policies, better monitoring of accounts, and more effective collection policies. You may wish to consider credit cards or cash only as a means of sales.
Delayed payables
Establishing a good working relationship with your suppliers can result in extended payment terms. Make certain they are aware of your loyalty to that firm and your repeat business. You may be able to negotiate a discount on volume or regular purchases.
Restructuring payment arrangements
There are times when a small business is not able to maintain monthly payments plus interest on loans or repayment to creditors. By using creative negotiating techniques, there are ways of getting around short-term problems. Some alternative repayment plans that you may consider include:
* A period of grace for principal loan payments during the start-up period of your business operation.
* Blended payments that feature a long amortization period resulting in low payments of principal in the early years.
* Graduated payments; that is, low payments on principal in the early years and higher ones later on.
* Payments of principal during the high season only, so that the business does not have a cash-tight period during the low sales volume season.
Selective product lines
Only handle product lines on which you get the most favourable terms from the supplier and which have the highest sales turnover and profit margin.
Fixed assets
You may wish to sell your assets to a leasing company and lease them back, thereby freeing up cash for working capital purposes. On reviewing your assets, you may feel that some of them are not necessary to the business and may be sold to free up additional cash. By purchasing secondhand equipment and machinery, you can reduce financial outlay.
Renting or subletting
You may decide to rent space for a store or factory rather than buying, to improve your leverage and your cash flow. By subleasing space you can offset your monthly payments, thereby increasing your working capital.
Stringent management
By reviewing the points discussed above to determine how to conserve on capital and save on expenses, financial resources can be freed up and the business risk minimized. The business owner should analyze the financial condition of the business on an ongoing basis.
Are salaries too high?
Is the owner taking out too much from the company for personal earnings rather than keeping it in the company for working capital?
How do the company’s costs of goods and other expenses compare to other companies in the industry?
Is the lease too expensive?
Are supplies being wasted?
How do actual expenses compare to budgeted expenses?
The business owner knows best where expenses can be trimmed from the operation. In addition to controlling expenses, the owner should always be looking for ways to increase profits, sell surplus inventory or assets, and maintain an effective receivables collection program.
