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Small Business: It Takes Money to Make Money

Your business is growing and cash is tight.

By all indications, the operation is profitable. Revenues exceed expenses, new customers are routinely added and your staff is well trained. So why are you running out of cash?

Small Business Working Capital Learning Topics:

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Cash Flow Uses

A growing business uses up a lot of cash. This can be especially true for businesses that sell to other businesses (B2B) and extend customer credit through invoicing and delayed payment terms. This essentially means that cash invested to fill the order is not replenished until the payment for the order is received.

It is bad enough when a business goes bankrupt because it's not profitable, but to go out of business because you don't have the cash in hand to fulfill increased demand is a real tragedy.

Cash Flow Sources

There are basically six ways to increase the availability of cash in any business; new investment, borrow, increase sales revenues, reduce expenditures, delay payments (accounts payable) and accelerate accounts receivable payments (i.e. factoring invoices).

  1. New Investment — Utilizing your own resources or securing an investment from some other source is generally a one-time event. It is not a way to sustain cash flow, especially in a rapidly growing company.
  2. Borrow — Traditionally, smaller businesses would turn to their local bank to borrow the funds needed to help support ongoing and growing operations. As a result of the credit crunch over the past few years this option has simply not been available. Even today, it is extremely difficult for smaller firms to borrow the funds they need.
  3. Increase Sales Revenues — Sell more products or services. Increasing sales will increase revenues unless the sales are being invoiced as is typically the case with B2B sales. Here there are two considerations to keep in mind. The sales must be priced at least sufficiently to cover any related costs (Cost of Goods Sold; increased Administration support), and the difference in timing between when you are paid for the invoice and when you must pay for any material, products, labor or any other related costs incurred to support the sale. In a rapidly growing company, increased sales can be a primary contributor to a negative cash flow.
  4. Reduce Expenditures — Spend less – a great strategy for any organization. A continual review of expenditures will help to assure that you are spending only for what you need to support the organizational objectives. The difficulty comes into play during a time of rapid growth when it is easy for expenditures to get out of control.
  5. Delay Payments (Accounts Payable) — Accounts Payable are created when the business purchases goods and services to support sales and overall operations. When the supplier extends you credit by generating an invoicing with delayed payment terms, you essentially get what you ordered and hold on to your cash until payment is due. The longer you negotiation the payment, the longer you control your cash flow.
  6. Accelerate Accounts Receivable Payments — There are two ways to accelerate accounts receivable payments. One is by offering customers a "quick pay" discount expressed as something like 2%10Net30, which provides an incentive (a 2% discount) if they pay sooner (in 10 days) versus later (30 days). While the 2% represents a cost and may make your business look weak, as long as the profit margin is higher, you're still making money as well as gaining cash in hand sooner.
    The second way to accelerate accounts receivable payments is through factoring invoices. Factoring invoices involves selling the invoice to a third party, a factor, at a discount in return for getting paid sooner rather than later. To learn more about factoring, read The Ins and Outs of Factoring.
Did you know?

"...that 1st PMFBancorp® was founded in 1985 as a family run lender providing invoice factoring? As their clients' businesses expanded domestically and globally, services were expanded to provide additional short-term credit and financing solutions including credit reports, monitoring, insurance coverage on invoices and supply chain services. Today, 1st PMFBancorp serves as one of the leading U.S. private commercial lenders specializes in providing domestic factoring and trade financing for import/export needs between the U.S. and China."

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Other Small Business Working Capital Learning Topics:
Working Capital Know-How | Factoring | Alternative Financing | Increasing Cash Flow | Special Finance Services

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Note: This information has been compiled by the Knowledge Institute for Small Business Development (KISBD) for educational purposes only in order to convey a general overview of the options and related services available to small businesses in the subject areas introduced. Content is provided on an "as is" basis and is not intended to be an exhaustive representation, nor does it provide advice or create a customer relationship between KISBD and its sponsors,, its affiliates and any other organization named herein, and any reader.

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