Managing cash flow in difficult times

 

The challenge

Businesses don't fail because of a short term lack of profitability, they fail because they run out of cash.

The solutions

Keep cash flow plans up to date

  • Make sure your cash flow plans are regularly updated and are realistic.
  • Allow headroom in your cash requirements to counter unexpected variances.
  • Be aware of your current cash position, forecasts and bear in mind fluctuations.

Manage needs for working capital

  • Closely manage your stock and debtors to minimise needs for working capital.
  • Manage your supply chain to gain maximum credit.
  • Talk to creditors early if you need to extend terms.
  • Consider approaching the tax authorities to agree payment by instalments for past liabilities.
  • Don't ever commit to buying goods and services when you know you will be unable to pay. This is illegal!

Negotiate finance and explore the options

  • Get the right balance between equity, long and short term debt and asset based finance - don't take on short term borrowings for long-term investments.
  • Examine opportunities for finance, for example grants and tax credits.

Safeguards

  • Consider credit insurance to remove the threat of bad debts.
  • If the business is failing, recognise the fact and take professional advice. Don't operate in a mirage of optimism. Depending on the cause of the difficulty, professional advisers may be able to help.
  • If you are confident of recovery, seek new equity, bank or asset-based borrowing. If institutions won't play ball, try business angels, but don't feed the dragon!

Watchpoints

  • Think carefully before committing to a business model that will require further funding down the line, unless that further funding is contracted (especially in times of economic stress!)
  • Success (e.g. higher sales than forecast) can increase working capital requirements and cause cash shortages - don't overtrade.
  • Underperformance (e.g. lower sales, lower margins or higher costs) will adversely affect cashflow. Consider reducing overheads to stop the cash drain, but take care in deciding which areas to cut.

DISCLAIMER
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.

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