Chapter 4 – Finding Cash
When it comes to finding cash, knowing where to look is key. Steven Rogers writes, “Entrepreneurs have frequently asked me to help them raise external financing from debt and/or equity investors. Most of the time…I have told them that they do not need outside capital. They simply need to reduce their inventory and/or accounts receivable levels.”
Before you seek outside funding, take a look at both of these areas. Do you need all the inventory you’re holding? The ideal inventory calculation is this:
Ideal Inventory = COGS/targeted inventory turns
The acronym COGS stands for Cost of Goods Sold and your targeted inventory turns are the total number of goods sold from the COGS. If you have a number higher than the cost of the goods that were sold for one round of inventory, then you will turn a higher number, say 1.5 or 2. Once you have measured how much inventory you are turning in a given time frame against the cost to produce a batch, the it will be easy to figure out what level of inventory you need to keep based on this formula.
If you are providing a service, rather than selling goods, you may solely need to look at your accounts receivables. If you haven’t been paid for providing services, you may need to call on your clients and request payment. An entrepreneur could be sitting on all the extra cash they need if they were being paid in a timely manner. Offer incentives and penalties for making early, on-time, and late payments to help keep your accounts receivables up to date and paid in a timely manner.
When done correctly, managing your cash should be simple. Knowing where your money is at, is key to knowing how much cash your business has (or is owed). Managing your inventory helps keep extra spending at bay and managing your receivables helps keep your money coming in consistently. If you have managed to keep both of these issues managed, then it’s time to seek outside funding. Finding an investor may be much easier when they can see that an entrepreneur doesn’t waste money, isn’t afraid to collect their money, and knows how to manage the financial aspects of their business. This signals that a business is ready to grow.
Rogers, Steven. Entrepreneurial Finance: Finance and Business Strategies for the Serious Entrepreneur – Third Edition. McGraw Hill, 2014.