Generating Cash in a Tough Economy

Build on relationships and personal networks

Over the past several years I have had the privilege of working with entrepreneurs who are the leaders of a number of successful high-growth companies. Most of these entrepreneurs don’t like to take on debt or give up equity to grow their businesses. They are more comfortable growing organically, at a measured pace, because they are in it for the long haul and are not in a hurry to harvest the value they have created through private sale or public markets. For the most part, these are the value creators, or builders, of the Canadian economy, and collectively they have a significant impact on the quality of life that each of us enjoys.

Cash on hand is perhaps the greatest and most important challenge in today’s credit poor environment. So what can entrepreneurs do to increase the cash position in their organizations?   Here are three suggestions to get you started:

Keep it simple – think cash flow. Cash flow is your lifeblood and if you can manage your cash flow effectively today, you will position yourself well for the inevitable upturn. You can increase your cash position by adding to the cash coming into the business or by reducing the cash being used. Cash is king in most entrepreneurial endeavours and it is even more important when dealing with the current limited availability of credit. To some extent, entrepreneurs have an advantage over their older corporate counterparts who have never had to bootstrap a business.

Build relationships. Obtaining cash from traditional credit lenders is difficult for entrepreneurs under the best of circumstances (e.g. an ongoing relationship with a lender where you have a great track record; operation in a stable and growing industry; solid asset base). Given most entrepreneurs’ bias against debt, many will not have developed the relationships or track records necessary to get significant credit from traditional lenders. In today’s market this is even more unlikely for all but the completely risk-free bets. This doesn’t mean you should not begin or continue to build this relationship. If you cannot qualify for a large loan or line of credit, start small (better if you don’t need the money now) and build the track record and relationship.

Engage Angel Investors. Depending on your needs, you may still be able to engage angel investors to help improve your cash flow. They may be willing to help you convert debt to equity or give you more favourable terms than your current creditors. They may also be willing to inject the capital necessary to qualify for further financing. There are others currently searching for great partners. The key for entrepreneurs is to search out those who look to take long-term positions and grow value with the entrepreneurs running the business. Use your networks and do your due diligence before partnering with anyone. Stay away from the traders and speculators who at best recycle the value you’ve already created.

In next week’s second of two articles in this series, we’ll examine in more detail two other sources to tap into or generate cash from during a tough business environment—Customers/suppliers and Cost Reduction.

Eric Morse is Associate Dean, Programs, and the JR Shaw Professor in Entrepreneurship and Family-Owned Business, at the Richard Ivey School of Business.

This an excerpted version of an article that first appeared in the Ivey Business Journal.