All businesses need cash to operate. Without it, you can’t repay expenses let along find new ways to grow your business. But where can you go to find that needed cash? There are only three options: an investor, a bank or within your business.
Considering an Investor
Many business owners I’ve met started their businesses by cleaning out their savings and maybe their children’s college savings… then maxing out credit cards and securing personal loans. Chances are you, or your business’ founder, used similar tactics. You were the original investor in your business.
So when your personal finances are all maxed out, you begin to consider another investor. You think the answer will be someone else who can put money into the company in exchange for a share of it. I often compare this option to moving back in with your parents. While you will get the money you need, someone else will be micromanaging your every move.
In reality, most business owners want the cash, but not the hassle that comes with having an investor. And more often than not, those business owners that have turned to investors regret that decision.
Turning to a Bank
While banks are wonderful and a great source of financing for many businesses, they are not the endless supply of cash you’d like them to be. Just like any business, they too have a profit margin – and it’s usually less than 2 percent of a loan amount. So for every business that defaults on a loan, they may need to make 100 good loans. The risk of one simple bad loan has a substantial impact on a bank’s business.
When a bank makes you a loan, they are doing so because they believe you’ll be able to make the required payments. They need your money back to be profitable and to have dollars to loan additional business. Over the past few year, and still today, banks are a lot more cautious making loans, and rightfully so.
Is there a way to free up that cash flow within your business? For example, let’s say you’d like a $1 million loan to buy additional inventory. Take a look at the inventory you have today. How much inventory has been there more than a year – $500,000, $1 million or even $1.5 million? Is there a way to sell it? How about accounts receivable? Can you get your invoices our faster and get them paid quicker? The cash flow you need may very well be tied up within your business.
If your business doesn’t generate cash flow, you need to fix the problem. Start by measuring your cash flow. You will find this number on your cash flow statement; it’s called cash flow from operations. Then manage your cash flow by improving all the components of the cash flow equation:
(healthy sales x gross margin) – fixed costs +/- working capital
If you can generate cash flow internally, the bank will loan you money for future expansion and you’ll never need an investor. Your cash flow will help you grow – or grow up – so you are able to do all the things you want to do with your business.
Contact our Ohio CFO services team
Don’t know how to drive internal cash flow? In need of a cash flow intervention? Contact Rea & Associates. Our Ohio outsourced CFO services team can help you optimize your operations to get the cash flowing. Count one of our experienced CFOs as a member of your team, for as much or as little time as you need.