Wednesday, January 27th, 2021

Become a Cash Flow Ninja

By Chris Green on Oct 18 2010 • Filed under Chris Green's Legal Basics

A business person at any level will tell you that the capitalization of a business is the cornerstone to its success. A business of any nature without sufficient operating capital is doomed to fail. Money has to be found, with depressing regularity, to pay the rent, meet the payroll, buy raw materials and so forth, regardless of the state of your sales or the state of your accounts receivable, so there always needs to be a cushion of available cash to meet the operating expenses at all times.  

The size of the necessary cushion grows with the size of your business and the problem becomes particularly acute if the business is expanding rapidly, since each month you are putting out more money you made that month, to pay for the increased amount of product that you will sell next month.

Very large corporations have the luxury of raising the necessary operating capital by going to the markets and issuing publicly traded shares, bonds or debentures, but small or medium-sized enterprises are stuck borrowing from the bank or using the owner's personal resources, and as everyone knows banks can be particularly difficult to deal with since they are so risk adverse.

How can one deal with this cash squeeze? Well, the best business people are all cash-flow ninjas, chopping ruthlessly at every business and personal expense they can. Cutting expenses is the single most efficient way to improve cash outflow, since these changes are enduring, whereas nothing that you do to try to juice your sales will prevent fluctuations month-by-month or season-by-season.

A proper credit policy and close management of your accounts receivables can also pay big dividends. As a business you are not obliged to give credit and if you do you are the one who sets the terms. Make sure you have, and use, a credit application for your customers.

Many businesses find that they are able to enhance their cash position by using barter, with true recognized trade exchanges, to replace a cash outlays for some of their business expenses. Advertising, web design services, couriers, printing and even legal accounting services are all available on barter.

Another little-known trick to increasing available operating capital is to factor your accounts receivable. Essentially you sell your invoices to a "factoring company" who pays you for the up front and then collects them for you.  This works extremely well if you have customers such as various levels of government who are always eventually good for their money but are chronically slow to actually pay.

The original inspiration for this article, however, stems from my membership in a micro-finance organization known as KIVA. If you think that you have problems as a small- or medium-size business in obtaining adequate working capital, imagine the plight of a micro-entrepreneur in a Third World country who has absolutely no access to bank financing or  private lending, and absolutely no personal savings to fund the start-up or expansion of their business.

To a micro-entrepreneur, doubling the size of his business might have been increasing the size of his goat herd from three goats to six, but where is the money to come from to fund such an expansion.

Five years ago the Kiva organization was founded to address this Third World problem. It partners with local agencies to identify worthwhile micro-entrepreneurs in places such as Peru, Uganda and Kenya, and advancing small loans in the $500 to  $1000 range.  They have a loan repayment rate of over 97% which would be the envy of any Canadian bank lending to Canadian businesses! Kiva does not use its own money to make these loans,  but rather acts as a broker.  Each loan is  syndicated over the Internet, amongst a worldwide group of lenders who each lend $25.  As the money is repaid, typically in increments of two or three dollars, the lender can receive their money back or, as it usually happens, can reinvest in another micro loan. I think this logo program will spark the imagination of any small business person who has ever said to themselves, "Imagine what I could accomplish if I only had the capital!"  Your brothers and sisters in the Third World say exactly the same thing, and the impact when they are given the money to realize their business dreams can be quite spectacular.

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