Use "OPM", Other Peoples Money

Developing a network of financial backers that have liquidity is critical in the growth of any business.  Whether you are planning to have investors or not, cash flow is crucial to every business.  Formal (investors) or informal (Uncle Joe) sources of cash will allow you to take advantage of opportunities at the speed of business.

In the Private Equity world, we call it the “Capital Stack”.  What are the sources of your funding and will they be available when you need them?  If you are building a retail facility, do you have enough money to complete the build-out of the store?  Maybe the landlord is contributing, some will come from your savings, and you have a loan for some.  If there are construction overruns (inevitably there will be), where does that money come from?  Another scenario could be that one of your competitors is going out of business and is offering to sell you their inventory (that you know you can sell quickly) at 90% off the wholesale price.  Do you have the cash to put that profit in your pocket?

The best time to establish these sources is before you need them!  Waiting until you need them will almost assuredly cause you to miss the opportunity.  Your soon-to-be former competitor will be in a hurry to purge his inventory and will be offering it to everyone just to get quick cash.  In the case of the build-out, lenders will quickly identify that you didn’t plan well enough, a red flag for them, and most likely not approve the additional capital.

It’s important to note that there are many sources for these funds and that they all have different associated costs.  The sources can include Traditional Banks, Credit Cards, Private Lenders, Suppliers, Angel/Private Equity/Venture Capital Investors, and Friends and Family.  The least expensive will require the most time (with the possible exception of “Uncle Joe”), while the quicker, higher risk lenders will want to get paid for assuming that risk.  None of them are bad if used correctly.  Don’t use a high-interest rate loan for long term debt.  You can use it to take advantage of an opportunity and then refinance with a lower-rate loan.

Banks and other traditional resources are fine for long term debt, (although this should be kept to a minimum), but it is the "friends and family" of the business that will create the ability to take advantage of short-term opportunities. 

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Mind the Pennies, and the Dollars will Take Care of Themselves

 -William Lowndes (1652-1724), former Secretary to the Treasury of Great Britain

This time-tested phrase warns us to be frugal and the little steps will add up to big things.  In business, this pertains to stopping profit leaks within the organization. Every company has profit leaks, the key is to develop systems and automate them to minimize the effects of these leaks, thereby increasing profitability and putting more money "in the bank". 

I once consulted with a start-up company with 10 employees.  As a small company, the leadership felt that they weren’t “big enough” to need systems and that they could save money by handling processes manually.  Every day, the employees would call them with questions about how they should complete this task, where they should buy this supply, even call in their time card hours. (Most of the employees were remote workers). With one or two employees this “system” had worked, now that they had 10 employees, leadership spent most of their day on the phone!  Obviously, this was a terribly inefficient use of the leaderships time and they were not able to work either in or on their company and the bottom line was taking a significant hit because of it.

In order to help them, I first had to show them how much of a negative effect this had on their bottom line.  They didn’t even realize it was a problem!  After a long conversation, they approved a test.  We implemented a cloud-based “time clock” and required each employee to use it.  Guess what?  Not only did they reduce the number of phone calls by 10 each day, (a time savings of 30-45 minutes daily) but the employees were excited to have a few extra minutes each day as well!  This worked so well the other systems I recommended was approved on the spot.

These changes left the leadership with more time to focus on increasing revenue and a platform with which to scale the business. (working ON their business)  The effect of increased revenue AND increased profitability simultaneously supercharged the company's balance sheet and valuation.  Whether you want increased cash flow as an operator, or to increase your valuation prior to a sale, the quality and utilization of your systems will make a big difference in your bottom line.

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