To succeed in the game of business, you must know how to win. It’s a complex game with myriad rules and imperatives, but the bottom line is always – well – the bottom line. You must make a profit to be able to financially afford to stay in business. Furthermore, if you have competitors, you will survive long-term only if you operate at least as efficiently, that is profitably, as your competitors. And the criterion is not dollars of profit but profit per dollar of assets. Yes, return on assets is one of the most basic barometers of business performance.
So as the business owner makes capital decisions, the strategy always should be to figure out how to get more from less. And because assets must be funded with either debt or equity, minimizing assets will lower the capital requirement and the capital cost that must be incurred to generate a given level of profit. Lowering assets also will generate one dollar for every dollar that assets are lower. As such, the benefits are twofold.
Ideas for getting more from your assets? Here you go:
Get paid more quickly: For many businesses, receivables are one of the largest categories of assets and thus tie up a large amount of cash. Most of us take it for granted that we must offer terms, but every day you reduce your average days outstanding will unlock dollars tied up in A/R. The first step is to simply collect more aggressively. The second is to see if you can restructure your sales to lower the amount you finance. Certainly, an early-pay discount can help. But if your products are highly valued, don’t be afraid to consider whether your customers would tolerate a tightening of terms you’re willing to extend. Change your terms to net 20. Or consider asking for payment up front.
Some businesses get away with it. Some probably do it to you. Maybe it’s as easy as “ask and ye shall receive.”
Reduce Inventory: Inventory turns. How often do you turn over your inventory each year? To reduce inventory, unlock cash, and improve efficiency and profitability, you need to reduce inventory you carry on hand. First, sell inventory that’s old and not turning. Second, begin tracking turns and levels. Often the simple exercise of tracking and sharing information will result in improvement. Third, ask your vendors to help you lower inventory and improve turns. You know – the ol’ “just in time” stuff.
Lease rather than own: Owning things ties up capital. Renting can substantially reduce the amount of capital tied up in your business and thereby improve return on assets. But it’s a form of debt, and will raise the fixed operating costs and thereby increase financial risk. Still, the business owner and manager should understand his business, his tolerance for risk, the business’ ability to handle debt, cost of capital, target returns, and make rational decision on issues such as lease versus buy.
Outsource capital-intensive segments: Business requires all sorts of processes: marketing, sales, administration, fabrication, warehousing, shipping, etc. Just as few of us would buy our own trucks and planes and hire our own drivers and pilots to handle our own shipping (rather, we outsource this need to others), you should consider the possibility of outsourcing each of the many parts of your business. Technology and the evolution of our highly specialized economy make it possible. In fact, current business strategy says we should do only what is critical to our business’ success AND what we can do ourselves better than anyone else we could outsource to. So, to reduce money tied up in our business, and increase asset productivity, consider using more outsourced providers. The first place to look is parts of the business that require dedicated assets and at employees not being used near capacity.
Invest excess cash: Cash is an asset. The profit maximization game entails maximizing dollars of profit that can be squeezed from every asset. Cash not used in the business, even for short periods, can be invested to gain some yield.
Do you have more ideas? Please send them to Editor@TheBusinessOwner.com so we can share them with everyone.
This article originally appeared in The Business Owner Journal, the periodical of choice for owners of small and midsize private businesses. All rights reserved, D.L. Perkins LLC. © 2012.
This publication is intended to provide general information on the subject matters covered. It is sold and distributed with the understanding that neither the publisher nor any distributor or advertiser is engaged in providing legal, tax, insurance, investment or other professional advice. The advice of a qualified professional should be sought before any reader applies a concept presented herein to his or her particular situation or business.
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