Like a mirage in the desert, outstanding accounts receivable can lie just beyond the reach of the cash-strapped business owner. Except this is no mirage — it’s real money, and it’s yours. But until your customers decide to pay you, it’s still out of reach.
How can you get to this trapped cash and put it to 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 in how you run your business.
However once you release this money, there’s no point in letting it sit idle in the bank. This new cash is working capital and it’s your job to put it to work. Make sure you have enough on hand at all times to cover immediate operating expenses. But once you’ve built up excess cash you can begin to spend it.
Here are some recommended uses for this extra cash, ordered by importance:
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 can attract make this an extremely expensive and dangerous source of working capital.
Pay past-due accounts payable. Supplier credit is your best source of working capital and you need to treat it as such. Since there’s no interest, no collateral, and no personal guarantees, you can’t do better. Strive to build strong relationships with your suppliers by paying on time but first remit all past-due balances. Then whenever possible take advantage of early-pay discounts. Not only do these discounts go directly to your bottom line but over time you will earn the title of “preferred customer,” which is a very good designation to have for its many perks and benefits.
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 attract and retain the best salespeople. You might also consider investing in better marketing materials, which will help increase sales over time.
Build inventory — carefully. It’s 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 and work toward a more fluid inventory-management system. If product isn’t moving, consider discounting it to get it off your shelves.
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 save money in a variety of different ways.
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 equipment or enter into more favorable financing terms.
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, which provides creative financing solutions to small- and medium-size businesses across Canada. Klausen 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.