What can we do to free up cash?

We are growing fast and need cash but are reluctant to saddle ourselves with big borrowings. What can we do to free up cash from within our business?

A big topic of conversation at the moment is the availability, or lack thereof, of bank funding for small businesses. While the banks are saying that they are back in the lending game there are plenty of small businesses struggling to access funds. And it’s a problem because growing a business requires a fair cash injection!

Interestingly though many businesses could free up cash from within their business, if they only knew how. To help, I suggest that companies think about looking inside their businesses for cash under three headings: strategic, tactical and housekeeping.

Strategic

Dell famously transformed its business 20 years ago by custom building for consumers. The clever part was that by taking cash in advance and paying their suppliers in 60 days they were able to reduce their cash cycle from 63 days to negative 21 days, thus freeing up an enormous amount of working capital.

Small businesses can change their business models to free up cash too. It’s certainly not easy to and I acknowledge that it requires a lot of imagination and innovation but if you at least put it on the agenda you give yourself a fighting chance of finding a solution.

Tactical

This is about making a change to the way you do business but is not as radical as the business model overhaul above. A good example of tactically freeing up cash is the professional services firm which moved its billing day forward by two weeks. This meant that the firm’s invoices got into their clients’ payables ledger before the month end EFT run and a good proportion thus got paid a whole month sooner. Tactical measures are not that hard to come up with but they are rarely given enough senior management thinking time. Again, get it on the agenda

Housekeeping

The third source of freeing up cash is basic housekeeping such as invoicing on time, chasing debtors, running credit checks, sticking to credit limits and negotiating supplier terms. A few weeks ago I wrote about discipline in business and I referred to the problem in US hospitals where the lack of hand washing is a major cause of death. The parallel with small businesses is that lack of basic debtor management is the death knell. Basic housekeeping (or hygiene if you will) is easy to implement, but let’s face it, it’s unexciting. So a good idea with housekeeping is to focus on it intensely for a quarter and raise its profile as a whole business priority.

Freeing up a decent amount of cash from within a business to fund growth may be quite doable, but you need to harness the collective intelligence of your team. You can’t just leave it to the finance team; it’s a whole business issue.

Julia Bickerstaff’s expertise is in helping businesses grow profitably. She runs two businesses:Butterfly Coaching, a small advisory firm with a unique approach to assisting SMEs with profitable growth; and The Business Bakery, which helps kitchen table tycoons build their best businesses. Julia is the author of “How to Bake a Business” and was previously a partner at Deloitte. She is a chartered accountant and has a degree in economics from The London School of Economics (London University).