Capital Boost: Internally generated cash through operations
Sunday 8th May 2011 - By Leo Alarcon Share
During the Global financial crisis of 2008 many corporations and businesses in western economies faced unprecedented financial pressures. The businesses which over levered their balance sheets or assets were forced into either selling assets in a falling market or to raise capital in at high costs in both debt and equity markets to shore up their balance sheets and keep operations going. The need to access cash was not only evident in the financial sector but also in manufacturing based industries with extensive operations and investment in working capital. Many of these businesses would not have realized the potential of the cash lying within their operations or the cash generation potential of their operations if they were run efficiently, well run inventory systems embedded into a just in time production model, flexible operations with quick changeover times, and a higher proportion of variable costs versus fixed costs.
Operations, depending on the business, can hide many opportunities to generate funds for the business. Excess inventory or obsolete inventory is an easy starting point as well as raw material inventory holdings. Other opportunities may be unused plant and machinery, spare parts, repairs and maintenance contracts, use of many different suppliers compared to a smaller number of suppliers to obtain better pricing.
The opportunities are many and the size of the savings and cash extraction can be substantial depending on the size and inefficiency of the business and its operations. The cash extracted from operations is a much more efficient way of obtaining funds to shore up the balance sheet and/or fund further growth through capital projects and improve return on capital. This avoids having to pay banking fees in raising capital and over committing the organization financially.
Boosting the balance sheet and capital reserves for your organization shouldn't be dependent on issuing equity or debt, looking closer at your operations for inefficient use of capital and money tied up in excess or unused inventory and other assets can yield cost efficient methods of boosting the balance sheet and improving return on assets.
Even in situations when a business doesn't have an immediate need for capital, management should always endeavor to employ capital in the most efficient way possible that delivers the best return for shareholders.