INTERNAL SOURCES OF FUNDS
Many business owners seeking financing from outside sources could possibly be in a position to use their own resources, providing inventory purchases, accounts receivable and accounts payable are handled correctly. This could “free up” funds otherwise unavailable. It also makes your business more efficient and puts you in a better position the obtain outside financing, should this be necessary.
One obvious source is accounts receivable. A business needs sufficient capital to meet its current commitments but if money is tied up in receivables can be converted into cash in a minimum period of time, the business firm will lose its liquidity, exhaust its credit and find its growth potential limited. Receivables can be reduced by better credit policies, better policing of credit or by more diligent collection policies.
The granting of credit can often lead to precarious situation of a business. Many business have failed because of bad debts. There would be fewer bad debts and overdue accounts it more attention were paid to the initial granting of credit. Business managers should not overlook the difficulty of collection because of the prospect of a good sale.
A good accounting system is crucial to controlling account receivable. Accounts should be regularly aged and overdue payments immediately flagged for attention and action.
Some businesses post and balance customer accounts on a current basis, thereby allowing them to send out statements costumer early in the month. It is important to recognize that the quicker receivables are turned into cash, the quicker the firm has money available with which to finance inventory and other assets.
Improper inventory control is both common and a major problem. Very often, small businesses do not maintain the proper level of stock: either too much is on the shelves, or you have stock which sits on the shelf for months. This represents money you cannot use in your day to day businesses at today’s interest rates, having large amount of money tied up in inventory can represent a formidable expense.
You must schedule your inventory purchases in such a way that have neither too much nor too little. To do this, you estimate when sales are likely to be made and ensure that you have a basic level of inventory at all times, this may result in some excess, but with experience, you can gradually refine your guidelines.
Some businesses may need to purchase inventory more than a month in advance. You can follow the same idea but adjust to suit the peaks and valleys in you expected annual business flow. In other words, develop long range schedules for your purchases. When you have established a minimum for any period, you purchase enough new units or manufacturer them so that units on hand plus new units equals the monthly minimum in preparation for the succeeding month.
Often businesses can benefit from credit granted by suppliers. Under competitive pressure, suppliers may be prepared to provide financing trough special or extended terms of payment. However, a business can become too firmly attached to a particular supplier because of significant credit assistance. This could lead to the situation where the business will have to continue to purchase from the supplier, even if the supplier ceases to be competitive in term of price, quality, delivery, and service. Good credit terms from supplier can come about as a result of careful, tactful negotiation by the buyer.
Some businesses obtain credit by delaying the payment of their bills. Some of the most respected businesses in the world use this tactic but, sooner or later, a firm runs the risk of losing the goodwill of its suppliers. Habitually poor bill payers can expect their suppliers to impose stringent credit conditions to the extent of asking for prepayment of good of services. As well, those who are slow to pay can expect slow delivery and poor service.
A new small business can expect supplier to be careful about granting trade credit. The best policy is a frank discussion with the suppliers about the terms they are willing to extend and full disclosure of financial plans. A small business with good equity capital and managed by a person who showman awareness of financial management can usually get fair accommodation from the beginning. As the business’s creditability with suppliers grows, extended terms can be negotiated. However, a small business sooner or later should demonstrate its ability to pay early and promptly.
Prepayments and Employees
I some cases, a business can encourage it’s costumers to make payments prior to production or delivery of the goods or services. For example, mail order businesses generally ask for payment prior to forwarding their goods to their costumer. Custom manufacturers also often ask for prepayment of goods. These prepayments may form a fairly permanent source of working capital. Sometimes special pricing and special terms may be necessary to attract prepayment deposits.
Another source of internal financing which may be available to an existing business is its employees. Employees with access to capital may be willing to invest in the company because they understand its products and trust the management. If an employee has a stake in the company’s future, it could positively influence his working habits and concern for the company success. On the other hand, because the employee has a share in the business, it could prove difficult to remove, retire, or replace him if he becomes unproductive or uncooperative. The idea of employee investment should be approached with the utmost caution.
Stretching Your Business Dollar Further
Besides manipulating accounts payable and receivable, and planning basic inventory scheduling, there are number of ways in which short term benefits may be realized. Such considerations as those following often mean less stable long-term positions, but they have their place quite legitimately in business practice, especially for a new and developing business.
- Rent factory or store space instead of building or buying
- Purchase second hand machinery
- Substitute extra labor in place of labor saving equipment
- Assemble rather than manufacture, i.e. sub-contract out if possible
- Purchase an existing business instead of setting up a handle new operation
- Handle only those product lines on which you get the most favorable credit terms
- Sell only to cash or quick paying credit costumers
- Develop more efficient production scheduling to get products available to quick sale, but at greater cost per unit
- Operate as a subcontractor to larger business
Most of these methods of conserving capital or making the dollar stretch farther, though often used in small business, do have serious shortcomings. In effect, they postpone the day when new capital investment in required to replace worn out machinery, or to undertake economies of scale that are delivered from buying materials in bulk.
Some such as leasing or renting premises, specializing in certain product lines, or acting as a subcontractor may be sensible business decisions over the long term. One must realize that borrowing on secondhand assets or with no plant ownership to underpin a mortgage, may make it difficult to give stability to a business, and to obtain operating funds when needed – but a great number of successful enterprises have nonetheless developed along these lines.Next: External Sources of Funding