Poor cash flow has an effect on many companies, even those with highest profits. When you are always taking on more customer orders and dealing with the day-to-day business, it can be difficult to envisage that the company is actually in a serious situation due to poor cash flow.
Although cash flow is by no means the be-all and end-all, and many companies stay afloat despite this struggle, it does often create a situation in which one small downturn can have disastrous consequences.
It is important to understand the factors that are contributing to poor cash flow in order to avoid the decline of the company, so we always advise seeking help from an insolvency expert. It doesn’t cost the earth for an adviser to identify the cash drains, and offer quick solutions to avert insolvency.
There are a few specific options that you should look into at the earliest stage possible;
1. Forecast your cash flow
Using cash flow forecasts to predict the cash that will be in the business over the coming months is important because it can highlight any potential shortfalls.When you are aware of the periods of time in which the company will be short of cash before they happen, additional finances can be sourced (or saved) before it gets to that point.It is obvious that avoiding emergency action is preferable, and avoids late payments to company creditors.
2. Debtor organisation
Credit control procedures can be vital in controlling poor cash flow. Consistent chasing of payments often acts as a quick fix by helping the regular influx of cash in the bank.Another method which is easily implemented is invoicing throughout the month rather than doing it all at once at the end of the month.
3. Pay attention to costs
Of course, cutting costs will benefit any company’s cash flow position. Streamlining the business in this way, especially when used alongside other methods, can ensure that working capital is always available.It is not always easy to decide where you can cut costs.
4. Are you reaching your potential?
Another way to negate poor cash flow is to identify new target markets.There may be a way to extend your company’s reach within your own market, as well as looking to other markets for additional revenue streams. However, this is often an appropriate long-term fix once your cash flow forecast has been compiled.
5. Negotiate with creditors
Negotiating with creditors may sound daunting, but as long as suppliers aren’t left in the dark or ignored, they are often willing to consider reduced monthly payments, especially if you have been reliable in the past.This could allow the company to have the breathing space it needs. Just be aware that this doesn’t usually stop any additional interest or charges, unless they have told you otherwise.
6. Source funding
It makes sense that injecting additional funds into a company will help with poor cash flow. The type of funding that you should seek out will depend on your circumstances.A flexible source of income can provide working capital to keep you afloat; invoice financing can be utilised so that you don’t need to wait for customer credit terms to be spent.If your company is going through a period of rapid growth, a larger sum can be borrowed against company assets to fund this period. We should re-iterate here that cash flow forecasts are essential, as loans do have relatively long application processes; you don’t want to be taken by surprise and left in the red.
7. TTP (Time to Pay) arrangements with HMRC
If your company is finding it difficult to keep up with its involuntary creditor HM Revenue and Customs, you are not alone.It is important that VAT, Corporation Tax and PAYE reserves are not used within the business, because if HMRC suspect that the company is insolvent, they can issue Winding up proceedings within a small time frame.This process is also often called compulsory liquidation, and forces your company to close while they investigate company matters.If HMRC are chasing your company for money, this doesn’t mean the end of the road – you may be able to negotiate with them to pay the debt over a 3-6 period, or even longer.
8. CVA (Company Voluntary Arrangement)
Company Voluntary arrangements (CVAs) are appropriate for companies that are insolvent (can’t pay their debts as and when they fall due), but are considered viable once they have traded out of financial difficulties. Many of our clients have found that their company’s poor cash flow has spiralled quickly and instructing a licensed professional has proved to be the best way forward.
An Insolvency Practitioner (IP) oversees the procedure, which helps hugely in negotiations with creditors if informal efforts have failed. Consolidating all company debt into one manageable monthly payment, the director remains in control of the company and is able to continue trading as long as they payments are honoured.
Emma Blyth, Senior Client Manager, Forbes Burton