Grow Your Business Without Borrowing

Monday 10 November, 2008

by Sue Hirst

If you've tried to get new lending or renew an existing loan, you will know how hard it is right now. As a result of the credit crunch, banks have pretty much ‘shut-up shop' in terms of business lending to both small and medium sized businesses.

If you've got a basically viable business with great prospects this can be very frustrating.
Lack of lending means you can't grow your business as quickly as you would like. You can't afford to do the marketing you would like, and you can't employ more people to provide the goods and services your customers want to buy.
You've got to think a bit ‘outside the square' to come up with ways to manage growth from business cash flow and find ways to create efficiencies in your business. You need to free up cash from inefficiencies that may have become entrenched when cash wasn't an issue.
There are two places (financially speaking) where you can improve cash flow and find efficiencies in your business:

• Your profit and loss statement
  
• Your balance sheet

Profit and loss statement 

Sales

• The 80/20 rule
  
  Look at what you are selling, i.e. products and services, and determine which ones are making money and which aren't. If you want to grow you need to grow the profitable lines. It's the old 80/20 rule - concentrate on the 20% of customers, products and services that provide 80% of your profits. You may need to sack some customers! If they are not profitable you shouldn't be worried about them going to the competition.
  
• Internet marketing
  
  Can be much more cost effective than traditional forms of marketing. There are many ways to attract visitors to your website, and some of these are quite cost effective. Remember though, you want qualified traffic, not just traffic, so be specific about how you attract your visitors. Google Adwords, copywriting that takes your specific keywords into account and targeting blogs and forums that your potential customers frequent will all help boost your qualified website traffic.

Direct costs

• Look at what you are buying
  
  Look at the products and services you purchase and spend some time investigating and negotiating better deals and more efficient ways of delivering. One example is a business that delivers goods to customers weekly. They managed to agree with most of their customers to drop back to fortnightly deliveries - a 50% cut in one of their major costs! Think laterally about better ways to achieve the outcome.
  
• Don't underestimate your value as a customer
  
  Don't be afraid to shop around for other suppliers. If you are a good customer they will be bending over backwards to supply you at the right price.

Overheads

This is an area where you can make massive savings. Do a review of all overheads and ask yourself these questions:

• Why am I spending this and what ‘value' does it deliver onto the bottom line?  Should I cut it out?
  
• How could I do this differently to achieve a similar result?
  
• Who else could deliver this product or service, and how much would they charge?

Purchase orders

Introduce a purchase order system into your business 

No money gets spent unless you approve it. It may sound tedious but the resulting savings will far outweigh any tedium.

Balance sheet

• Outstanding customer accounts
  
  This is an area where I often see much needed cash just sitting there waiting to be collected. It will often cost much less to get the money in than the extra funds resulting from the effort. Once you get into this habit you will need to borrow far fewer funds to run your business.
  
• Supplier accounts
  
  This is an area where available money is often under-utilised. You should have very tight control over payments to suppliers. You need to ensure that you are not paying suppliers too quickly. I have seen this time and time again, where an employee pays the bills and is far too quick at getting cheques signed. This puts unnecessary stress on cash flow and the manager who has to deal with the result.

Stock

Try to think of stock as hundred dollar bills sitting on your stock room floor. The aim here is to have stock sitting in stock for as little time as possible. You need to know your stock usage patterns.

You can find this out by looking at previous times and setting a programme for purchasing stock i.e. not just when the sales rep calls in with an offer of a discount.  A discount could cost you precious cash flow. Do the comparison and you may find the discount actually ends up costing you lost sales, because you weren't able to sell other, more profitable products or spend money on marketing.

Jobs in progress

The aim here is to get jobs finished as quickly as possible so that you can invoice customers and get paid. If you can get a deposit to cover costs, this is a great place to begin injecting cash into the business.

Progress payments are also a great way to ease the cash flow burden. The best way to speed up finishing jobs is to have good systems in place to ensure no hold-ups occur and quality isn't compromised.

A job management system may seem like an expense, but once installed into your business you have it forever, creating efficiencies and improved cash flow.

Staff, job descriptions and incentives

Not a Balance Sheet item, but certainly a great asset in your business. Now is a good time to review how the business operates and who it needs on the team. 

Start by looking at all the tasks performed in the business (you may find some you want to stop doing!). Look at who is performing them now and how well they are doing. A re-shuffle of job descriptions might be in order.  It's much easier to get people to do what they will do and are motivated by.

When something comes up don't just hand it to the nearest person - ask "who is the best person to do this?". Understanding the strengths and weaknesses of your team members is a great place to start. There are analysis tools around to assist with this if you can't immediately put your finger on it.

Staff incentives are a great way to improve performance. Work out what are the ‘Key Drivers' in your business and create incentives to support them. Key Drivers are generally the things that create customer satisfaction in your business.

You will be amazed at the increase in positive activity when an incentive is introduced. Ensure incentives are based on profit, not just sales, and loyalty is built into them i.e. they are paid once or twice yearly.
If you can implement the above improvements in your business, the level of money ‘freed up' may mean you never have to go ‘cap in hand' to the bank again! Remember, the bottom line (profit) is ultimately where you want growth, not just the top line (sales). Business value is mostly calculated on profit, so this is what you want to concentrate on.

Source:ceoonline.com