My new small business is experiencing some cash flow problems. I asked a banker friend if he thought I might qualify for a loan, and he said I ought to concentrate on bootstrap financing at this stage. I thanked him and said I'd act on his suggestion immediately, of course. And I will--if you can tell me what bootstrap financing is and where I can get some.
Ignorant in Illinois
You have a wise friend. Bootstrapping is the first line of defense for businesses experiencing cash flow problems. Oscar Wilde once said that experience is the name everyone gives to their mistakes, and a bad cash flow experience is often the result of some pretty fundamental mistakes. Bootstrapping, or financing with internal sources of funds, is a way to rapidly reverse these mistakes and restore your cash flow.
Bootstrapping is a buzzword that basically means generating needed funds by deftly managing your cash inflows and outflows. Improving cash flow should be a daily task, like housekeeping. Monitoring, forecasting, and analyzing cash flows is essential to liquidity and profitability, even for the Fortune 500 crowd.
A basic list of areas where your "mistakes" can be addressed would include:
- Collection of accounts receivable -- Can credit terms or collection procedures be improved? How about billing cycles and/or cash discount incentives?
- Inventory management -- Do you really need all that inventory? It ties up cash, takes up expensive space, ups insurance costs, and often "shrinks," so if you don't absolutely need it for immediate shipping or manufacturing purposes, keep it lean and mean.
- Accounts payable cycle -- Vendors make good financiers. If they offer 30 days to pay, take 30 days and think about asking for 45. Set up a system to take advantage of early payment discounts, too.
- Expense control - Make every dollar count. Do you really need to rent that expensive postage meter or can you just buy self-stick stamps for awhile? Does your company van need to be washed at the fancy place down the block or can you spare a little time to do it yourself on the weekend? Thrift applies to fixed assets, too. Will a used computer do the job you were going to buy that Pentium 4 screamer for?
Learn from your experience. A little frugality and sensible use of available resources will pay big dividends in the long run. The old cliche "watch the pennies and the dollars will take care of themselves" is the bootstrapper's mantra. Make it yours and you'll have fewer mistakes and better experiences!