5. Fixed Assets
Investments in land, facilities and equipment take cash out of circulation. Thus, you should only make these investments if they will generate an immediate income stream.
Evaluate every fixed asset you have. Any fixed asset that doesn’t provide you the equivalent of a liquid return on your investment should be a candidate for sale.
Don’t assume that the appreciation of a fixed asset offsets the opportunity you lose by having your money tied up. Fixed-asset appreciation will always fall short of earning what liquid cash would if invested in the daily operations of your company.
Equipment – As a rule of thumb, unless you’re realizing at least 500 hours of production time per year, it is probably better to sell a piece of equipment and rent a comparable piece when needed.
Equipment – Leasing your highly utilized pieces of equipment is also something worth looking into. In the long run, leasing will always cost more. But it offers an advantage of not requiring a hefty outlay of cash on the front end.
6. Accounts Payable
Your suppliers can become some of your best allies. So don’t take advantage of their good faith. Treat them as you’d want your customers to treat you.
- Always monitor supplier balances via an aging schedule of accounts payable.
- Ask for terms. Most contractors don’t realize that “2/10 net 30” means that if you can pay your bill in 10 days, you’ll get a 2% discount. From the standpoint of the time value of money, that’s actually a 36% annualized discount. If you’re feeling really bullish, ask for “5/10 net 30”—that’s a whopping 91% annualized discount.
- If you run into cash-flow problems and can’t pay all of your bills in their entirety, just make sure everybody gets something every month.
- Maintain constant communication with suppliers. Non-payment might make them uneasy, but non-communication will make them mad.
7. Notes Payable
Every manager’s goal should be to operate debt-free. Still, if you must borrow, the following hints may help:
- When setting up a banking relationship, always do so with a letter of recommendation from your attorney, accountant or other advisor. Then, always go to the highest bank officer possible.
- Understand that a banker is not a business advisor. They will look at your business with a very narrow focus: repayment of loans.
- Remember that it’s easy to borrow money—until you convince a banker that you won’t be able to repay them.
- Never borrow money to pay for past mistakes; change your standard of living to do that. Only borrow to promote future growth.
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