Are you looking to recruit capital for your business? Do you need more working capital to sustain profitable operations? Before you go to the bank or capital markets, first look inside. Look at your own capital generation and analyze your company’s ability to generate cash. You may be surprised about the capital options this will produce for you. In this article I will discuss Sources of Internal Capital, Key Cost Factors, Capital Risk Factors, Capital Flexibility and Control Factors, and Capital Availability Factors.
Internal Capital Generation Sources
Using Retained Earnings
- Profit improvement.
- Expense Reduction.
- Reducing Owners Distributions (dividends/ drawings).
- Watching levels of Principals’ Salaries during early stages of Company Growth.
- Practicing good Budgeting practices.
- Successful Milestone achievements.
Good Asset Management
- Disposing non-performing Assets.
- Control Systems for Inventories, Receivables, Equipment, Machinery and other Fixed Assets.
- Understanding how lease finance can improve Internal Capital Generation.
- Schedule of Real Estate Control System to effectively manage your Company’s Real Estate Holdings.
Establishing Cost Controls
- Supplier pricing.
- Office supplies management.
- Cost Control Systems to minimize costs and increase cash flows.
Different Cost Factors That Affect Business Capital
- Customer Controls are too tight.
- Reducing inventories too much- not being inclined for increased Sales or Production levels.
- Poor Performing or High Expense Ratio Fixed Assets.
- Old, Expensive-to-Run Equipment/ Machinery.
- If Investor Funds are necessary, need to find a Capital Structure which will enhance Retained Earnings, yet award Investors a tolerable Dividend Payout Level and Capital Gains.
- Try to minimize Dividend payouts to Investors to enhance Earnings, while promoting a higher Capital Gain payout.
- Run several Financial Structure Models to find a Mix of Dividends and Capital Gain Payouts which enhance Earnings and placate the Investor.
Capital Risk Factors
- Not having links from Product Development to Marketing Planning to Strategic Planning to Financial Statement Modeling.
- Lack of Coordination will leave a lot of money on the table.
- Company inefficiencies can snowball and severely bind a Company’s ability to generate cash.
- Unrealistic Financial Management will significantly trim a Business’ Internal Capital Generation.
Consider Financial Flexibility
- Increased Internal Capital Generation can give your Company enhanced Financial Flexibility.
- Can tap Opportunities when they arise in the Market.
- Can carry you through rough Economic periods.
Mismanagement of Internal Capital will bring about high-priced inflexibility and unresponsiveness to Market opportunities.
Mismanagement can cause a reliance on higher Loan to Value/ Cost Debt Structures, which severely hamper a Business’ Cash Generation.
Control Factors Affecting Business Capital
- Have a solid Operating Agreement in Place with Investors so Control Issues don’t hurt future Cash Generation.
- Internal Control Struggles between Company Principals can cause a Rift in Company Management and significantly affect the Company’s earnings potential.
- Proper Budgeting Control Systems in place for effective Cash Management.
- Effective Cash Flow Management.
Capital Availability Factors
- Retained earnings can be enhanced no faster than Profits are realized; hence, Cash Generation is integrally tied to the effectiveness of your Strategic Plan, which is derived from solid Marketing Plan and Product Develop Plan.
- An Effectively Developed and Implemented Business Plan will ensure the availability of Internally Generated Cash and produce Financial Structures to effectively generate and manage Cash Flows.
- Increasing the availability of Internal Capital will create less reliance on other more costly sources of Capital, such as Debt or Equity Finance. what is more increased levels of Cash Generation increases confidence levels of prospective Lenders and Investors, proving the Company has an Effective Business Plan and can effectively manage its internal affairs.
Resource: See my article on How to Write a Marketing Plan for more help in the planning area.
About The Writer – Frank Goley, Business Consultant with ABC Business Consulting
Frank Goley has an experienced background working with small and medium size businesses as a business consultant, business turnaround consultant, business plan writer, business plan expert, small business consultant, business coach, business plan consultant, marketing consultant, business planner and online marketing consultant, and seo consultant for ABC Business Consulting. He has been helping companies to succeed for many years. Frank wrote his first business plan over twenty years ago. He is an expert in developing business plans, marketing plans, funding plans, strategic plans, turnaround plans, web marketing strategies, and project specific business plans. Frank is the author of a business plan book, The Comprehensive Business Plan Workbook – A Step by Step Guide to Effective Business Planning, and he has over 130 published articles and e-books on business success strategies. He also writes the Business Success Strategies Blog and publishes the Business Success Newsletter.