Solving Your Cashflow Problems and Keeping Your Business Out of Trouble

An all too common problem, most businesses will experience some cashflow issue in their lifetime. Here's a guide on how to manage it

Solving Your Cashflow Problems and Keeping Your Business Out of Trouble

Most companies at one time or another will experience a bump along the financial road – those that deal with it best are those that tend to look beyond just next month’s salaries and actively manage future cash requirements by having a good understanding of how the next few month’s trading will impact cashflow.

The best and most obvious way of doing this, is by producing cashflow forecasts and regularly updating them. Not too many directors/owner managers are qualified in the art of producing such information, but everyone in business should have some basic understanding of the monthly costs being incurred.

How to produce a cashflow forecast

With this basic information and knowing roughly what the likely sales will be over the next three months, it is extremely simple to put together a basic forecast. All you need is a basic understanding of the following:

  • What do you reasonably expect your sales to be each month for the next three months?
  • What payment terms have you agreed with your suppliers?
  • Is there any element of seasonality that may affect sales?
  • Are there lead times from your suppliers that could affect delivery?
  • Are there any staffing issues that could affect production/sales i.e. holidays etc.?
  • What are your basic monthly costs – rent, rates, light, heat, salaries (don’t forget PAYE & NI), other utility costs, motor, postage, stationery, web costs, finance and professional costs.
  • Materials/purchasers – what are your terms of payment with suppliers?
  • Do not forget to factor in when your next VAT payment is due.

Why do you run into cashflow problems?

Unless you have contracts that run for months, a three-month forward forecast is more than adequate – it’s hard enough looking that far ahead, without trying to forecast events well into the future. Most financial problems arise usually because of something that happens outside of your control – a customer goes bust on you, a supplier lets you down causing delays to your customers, an order that you were promised doesn’t arrive – the list goes on.

Any one of these issues could cause you a slight wobble in your immediate finances. The trick to sorting this is to recognise immediately that there is a problem and tackle it – if you don’t it’s not going to go away and solve itself! None of us like dealing with bad news, but the longer you leave sorting the problem, the greater it is likely to become.

What can you do to solve this problem?

The starting point is understanding quite what this event means – is it just a temporary blip – one that with time will rectify itself, or is it one that will need some additional resource to plug the gap?

If it’s one that requires additional resource, then ideally you do need to speak to a professional who has an understanding of all of the options available. Clearly you need to understand how much this impacts your cashflow and how much additional resource is required. The obvious starting point is the directors themselves – are they able to make a short term directors’ loan to the company – this will usually be the fastest and cheapest method of getting funds in.

After that comes the bank – however, they will no doubt need a fairly detailed explanation of why the company needs additional funding and with the traditional overdraft now being a rare creature, they will only provide additional funds if there is adequate security in the company and may also want personal guarantees from the directors.

Other areas to consider are:

Factoring or confidential invoice discounting: This is where you effectively sell your sales invoices to a funder – there are now literally hundreds of financial institutions in the UK that provide this type of funding. It can be fairly expensive, but what it does give you is immediate access to cash once you’ve raised an invoice

Asset financing: If the company has assets that are free of finance and other charges, it may be possible to raise finance against them. Again, it won’t be cheap, but better to be paying a few pennies interest than closing down. As with factors, there is now a plethora of asset backed lenders – just type “asset backed lenders” into a search engine.

Defer payments to suppliers: A tricky one this, given that you do not want to send the wrong message to your suppliers – you don’t want them coming to the wrong conclusion and then cutting your credit limit or putting you on stop. Work out exactly what you need to say to them and then work out how to say it.

It’s almost a racing certainty that your suppliers won’t like it, but most would rather still have you as a customer going forward, than see you go under and have to write off their debt. Be factual – confine your explanations and request to the key facts without blaming others 100% for the problem.

By all means explain what’s caused the current cashflow problem, but take some responsibility – your suppliers will think much more highly of your for doing so. Ideally pick up the phone first – it looks so much more professional, honest and personal – you can always follow it up with an email later.

Delaying payments to HMRC: Can it still be done?

The one entity you should never look to defer paying without their express written consent is HMRC – to do so without their consent is actually a criminal offence and in extreme cases could lead to prosecution.

Until the real time payment scheme came into force, delaying payment to HMRC was usually the obvious choice for directors whose companies were facing cashflow problems – they simply just didn’t send the cheque and hoped that it would take HMRC a few weeks to wake up to the fact that they hadn’t been paid.

Now, with the real time payment scheme, the payments due to HMRC go directly from your bank – you would now have to instruct your bank not to make the payment – that would no doubt alert your bank to a possible problem. HMRC will in certain cases consider granting additional time to pay, although they will require a detail report explaining why.

At this stage you would do well to take advice from a professional who knows what HMRC require, what they look for and how to structure it – most insolvency practitioners have this experience.

Deferring debt: How to go about it

Depending on the seriousness of the situation, if funding cannot be found, the equivalent is to try and defer debt, as outlined above. This can be done in a number of ways, either informally by writing to your creditors and letting them know about your current problem and seeking time to pay, or through some kind of formal scheme – possibly a company voluntary arrangement.

Once you get to this stage, then again, whilst you probably don’t want to because of all the stories you’ve read in the press, you really do need to have a chat with a licenced insolvency practitioner. There are some pretty decent ones out there – speak to your accountant – he will almost certainly know the best ones locally – ideally look for an independent practice – you will then get someone who also understands the pressure of running their own business.

The importance of tackling any debt issues head on and immediately cannot be stressed enough – most cases arise because directors either fail to recognise a problem or when they do, are rather too fearful to do anything constructive about it – put pride and fear to one side – the entrepreneurs who are successful know how to do this and – DO IT!

Richard Saville is a licensed insolvency practitioner at Corporate Financial Solutions

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