It’s a tough economy! Demand is low, costs are high, and interest rates have skyrocketed. Too many businesses face extreme challenges as they battle to maintain operational efficiencies and financial health. After working hard for many years to grow your business, you may now find yourself trying to come up with a plan to salvage a failing operation.
While trying to steer an underperforming business back on course is undoubtedly stressful, you can set yourself up for future success by taking action today to turn things around. If your business is underperforming, consider the following 8 key strategies to help tighten your belt, increase efficiencies, smooth out your cash flow, and improve your access to the working capital you need.
Strategy #1: Improving cost efficiency
Decreasing costs is the quickest way to improve your business’s financial performance. Here are some ideas:
- Renegotiate supplier contracts. Similar to a loan, signing a longer term contract with a vendor may provide an opportunity to negotiate a lower per-month price. Also, ask about early payment discounts that could knock a few percentage points off your overall bill. Another tactic to consider is periodically putting vendor contracts out to bid to ensure you receive the best possible pricing. Long-time vendors can become complacent over time, and the bid process is an easy way to encourage suppliers to sharpen their pencils.
- Eliminate redundancies. Repeating the same task can be tedious and frustrating for the employees involved. It can also be an operational inefficiency if two or more employees are engaged in the same task. Consider whether upgrading your technology can help eliminate duplicate work and increase the speed of automated tasks.
Strategy #2: Update (or create) a cash flow forecast
Identifying gaps in your cash flow is another key strategy to improve your business’s financial health. A cash flow forecast can help you determine when these gaps occur and predict future cash coming into your business.
The ultimate goal is to create predictable cash flow, which you can use to plan an accounts payable schedule.
Invoice factoring is one way way to achieve fast, reliable, and predictable cash flow. This flexible financing strategy converts accounts receivable invoices into immediate cash. It’s a simple funding process:
- Invoices are submitted to a factoring company.
- The factoring company verifies the delivery of products or services against supporting documents.
- Advanced funds, up to 95% of the invoice face value, minus a small fee, are transferred within 24 hours of the invoice being submitted.
- The balance owing (the reserve) is held until the business’s customer pays the invoice amount in full to the factoring company. The reserve amount is then released and transferred to the business’s account.
Because it uses your existing invoices as collateral, qualifying for invoice factoring is quick and easy if you do business with creditworthy customers.
Strategy #3: Revenue growth
One surefire way to increase your business’s financial health is to increase revenue. Here are some ideas:
- Increasing sales to current customers. Many businesses miss opportunities to increase sales with existing customers. Consider whether cross-selling and upselling are tactics that would work each time an existing customer makes a purchase. The best part about this strategy is it’s usually faster and cheaper to reach out to current customers about buying more from your business.
- Find new customers. Build a sales funnel so you have a consistent flow of incoming prospects throughout the year. Converting even a small percentage of these leads into new, paying customers will help add more top-line revenue to your income statement and help offset the normal customer attrition process.
Strategy #4: Asset utilization
When your business buys an expensive piece of equipment, there’s an expectation that this investment will contribute to your bottom line. Asset utilization is a metric used to measure how efficiently you’re using your assets and how good you are at pulling value from them. For example, running three 8-hour shifts a day to keep machinery operating full-time produces a higher asset utilization than shutting the equipment down between regular workdays. A higher asset utilization rate typically translates into increased efficiency and better profit margins.
Another way to pull value from assets is to use equipment refinancing. Leverage the equity value in working equipment, such as CNC machines, heavy equipment, and more, to quickly access capital that can be used to help turn around your company’s financial situation.
Strategy #5: Debt reduction
Too much debt on your balance sheet can squeeze the bottom line of your income statement. Reducing your company’s debt will decrease both interest expenses and monthly payments, which will help improve your net profit and overall cash flow.
There are many ways to reduce business debt. If you need additional business financing but don’t want to incur more debt, consider the advantages of invoice factoring, as discussed in Strategy #2. Because invoice factoring is based on the sale of an asset, you are not using the asset as collateral. As a result, you are not incurring additional debt.
Strategy #6: Transition to a flexible financing structure
Many traditional loans have rigid compliance rules that you must abide by or be at risk of violating the loan’s debt covenants. Transition to a flexible financing structure to enable more business agility and resilience to changing economic conditions. Alternative lenders provide specialized funding options tailored to your business’s unique capital needs. Easy qualification, scalable credit limits to keep pace with growth, and covenant-light funding agreements are just a few benefits of alternative financing options.
Here’s a closer look at a few of the benefits of using a flexible financing solution:
- Covenant light funding agreements. Traditional loan agreements typically include restrictive covenants that are meant as a way to protect the lender. These covenants can impede business growth by limiting borrowers’ actions and access to more credit. Alternative financing options are generally covenant-light funding agreements with fewer restrictions. With minimal lender oversight, business owners are freer to execute strategic decisions and pursue growth opportunities.
- Expanded credit limits. Alternative lenders leverage previously untapped asset strengths to access additional sources of credit. As the business grows, it will generate more value in accounts receivable, inventory, or other assets such as M&E. Credit limits can expand as business volume and asset values increase.
- Access more capital in multiple ways. With flexible financing, numerous funding options exist to access the capital you need. The most commonly used alternative financing options are asset-based lending and the aforementioned invoice factoring. But, depending on the lender you choose to work with, other business funding options, such as equipment refinancing and Visa commercial cards, are also available to increase your access to capital.
- Limited reporting required. Traditional loans may require you to submit reports or certified financial statements as evidence to the lender that your business abides by the loan’s terms of the agreement. On the other hand, flexible financing options, such as invoice factoring, typically have limited reporting requirements.
- Fast and easy qualification. A business possessing quality assets such as accounts receivable, or inventory can quickly and easily qualify for alternative business financing. The qualification process and first funding can be arranged in a few days or weeks, whereas traditional loan applications can sometimes take several months to complete.
Strategy #7: Acquisitions
Many companies view acquisitions as an opportunity to help jump-start a new growth phase. An acquisition can lead to a boost in profitability and a reduction in operating costs, not to mention tax benefits and possible opportunities to enhance equity. An asset-based loan from an alternative lender can help facilitate this type of transaction by providing a large injection of cash, up to $50 million.
Strategy #8: Structuring compensation packages
A business turnaround strategy often involves a restructuring of management. Attracting and retaining executive-level talent is an essential part of growing your company. But it can also be expensive.
Management restructuring can help revitalize your company in the long term, but in the short term, you could take a significant cash hit – it takes money to hire and fire! Funding hiring incentives and compensation packages are critical to the success of recruiting and retention initiatives. Plus, affording severance payouts is needed to release employees from their employment contracts properly.
Alternative business financing options can help access the capital you need and produce steady, predictable cash flow to support the costs of restaffing.
Turning around diminishing business performance levels and improving your company’s financial health depends on the development and execution of an effective plan. Implement strategies to reduce costs, improve cash flow, increase revenue, and maximize equipment utilization. Take actions to reduce debt and transition to a flexible financing structure to support initiatives such as acquisition strategies or restructuring of the company’s management team.
By adjusting to the harsh economic conditions businesses across all industries are now facing, agile and resilient businesses are finding new ways to prosper and grow. To ensure the greatest level of success, consult with business advisors and reputable alternative financing companies experienced in your industry. Their product, knowledge, and expertise will help you navigate the challenges of a down market and position your business to grow as the economy improves.
eCapital is a leading capital solutions provider for small and medium-sized businesses in North America and the UK. With the resources to fund double-digit million-dollar facilities, our flexible alternative lending solutions have been trusted by thousands of small to mid-size companies since 2006. Our customer base continues to grow as our reputation for dedicated service and forward-thinking solutions to even the most complex situations endure. Strong client relationships anchored in mutual trust are an essential part of our business model.
For more information about how our experienced team supports the capital requirements of businesses through all stages of development, visit eCapital.com.