Cash is king and a good flow of cash in and out of your business is what will keep it running. It doesn’t matter how big or successful your business is, if your outgoing payments exceed your incomings and you can’t meet your liabilities as they fall due, the simple fact is you have a cash flow problem.
Negative cash flow doesn’t always mean bad business. Sometimes you could just be unlucky and end up with broken equipment, machinery or perhaps the loss of a big contract. So how can you pre-empt the problems? Or what are the best ways of tackling the issue head-on?
The most common causes of cash flow?
Cash flow issues often stem from a lack of planning. During the planning process of any business, creating a cash flow forecast is vital. This must include all estimated incomings and outgoings, which could absorb cash. Putting in all variations, such as seasonal differentiation, growth and yearly or quarterly tax bills is a huge part of planning out the process. A forecast should be able to give you an estimation of how cash will come in and out of the business for the next five years. This will give you the opportunity to spot any problems and realistically plan the growth of the business.
Many businesses commonly suffer from late-paying clients, who fail to pay their invoices on time. It doesn’t matter how many sales you make, if the money doesn’t come in quickly enough, any business will struggle.
Unexpected bills, coming through broken machinery, assets or office bills can often be a big hit to cash flow. These are things you can’t always prepare for and can come at the worst kinds of times. Likewise, for a lot of start-ups or SME’s they will often have loan repayments to make up, if interest rates are variable, these can have a massive impact
How can I prepare better?
Even after having completed a cash flow forecast, any business should be continually planning and updating it. But what are the good practices to implement as a way of making the most out of your incomings and outgoings? Although the idea of controlling money in and out of the business can appear an easy job, in reality, it’s not that simple.
- Before you take on any new clients, be sure to carry out intensive background checks and make sure you do a credit check. This should give you a much better idea of how reliable they are when it comes to paying their invoices.
- Make sure you’re assertive with clients, follow up on those who pay late. This doesn’t mean being overly aggressive, simply sending an email, or making a phone call giving a gentle reminder can go a long way to getting what you’re owed.
- As appose to taking full payments from clients, make it your business norm to collect deposits. This way, you can at least have some money coming into the business, as well as boosting your cash flow.
- Remember to make the most of your own contractual repayment terms. If you have a 30-day contract, there is nothing wrong with paying on the last day, if it benefits you.
- For businesses with regular suppliers, staying in good contact with them is critical. If you end up struggling with cash flow, having a strong relationship with suppliers, means you have a better chance of securing a late payment date, or a different alternative.
My cash flow is already bad what should I do?
If you’re already facing problems with cash flow, it might seem as though there is no end in sight. If the business has good prospects and good infrastructure, then there are ways in which you can put yourself back in the black.
If it’s late-paying clients, invoice finance is an ideal solution for covering the gap between waiting for payment and receiving it. Essentially a factoring company will advance you the value of your invoice, up to around 90% of its value. After first assessing the quality of your invoices and the potential risks involved, the factoring company will forward you the cash, before then collecting the cash from your client, taking their fees and then returning you with the change.
If you’re behind with creditors such as the taxman, your suppliers, or landlord, it could suggest there is a much bigger problem within the business. If you’re struggling to stay up to date with payments from creditors and you’re just managing to keep your head afloat, a formal repayment plan would be the best way forward. However, with any repayment plan, creditors are only likely to agree if they can see the business has a genuine future. A Company Voluntary Arrangement, is an agreement made with your creditors, whereby you pool all your debts together and repay them a percentage of your debt over a set period of time, lasting for up to five years.
Point of no return
If you feel as though the business is at a point of no return, and you see no alternative aside from liquidation, there is still hope. In some cases, you can put your business through liquidation and then buy by the assets and start trading under a new business name. This is also known as a phoenix company.