Solving Cash Flow Problems

We often encounter clients that need help solving cash flow problems. The unfortunate reality is that more than half of SMEs don’t survive longer than 5 years. Of those that fail, we’ve found that poor cash flow is a very good indicator of things starting to go downhill.

In this article, we have set out to identify the reasons behind these issues, and most importantly, the methods of solving cash flow problems.

 

Poor cash flow affects many companies

Poor cash flow affects many companies, even those with the highest profits. When you are taking on more and more customer orders and dealing with the day-to-day business, it can be difficult to spot that the company is actually in a serious situation due to bad cash flow.

Although having poor cash flow is by no means a death sentence, and many companies stay afloat despite this struggle, it does often create a situation in which one small downturn can have disastrous consequences.

It’s important to understand the factors that are contributing to bad 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 a company’s cash drains, and they can offer quick solutions to avert insolvency.

 

Cash flow – what is it?

The money flowing in and out of a business. Cash flow is usually measured over periods of time that are determined by the size of your company. For example, it could be quantified over annual, quarterly or even monthly periods.

 

9 ways of solving cash flow problems

 

Offering discounts on early payments

Early settlement discounts could solve cash flow problems quickly. Even offering relatively small price reductions of 2%-3% is likely to entice early payments from customers.

 

Invoice factoring

In a similar vein to offering early payment discounts, invoice factoring provides a quicker payment in return for a slightly smaller payment.

Factoring involves the instruction of a financial body to ‘buy’ your invoices from you. This can be agreed on a short-term or continuing basis. This way, the factoring company will pay the majority of the invoice amount upfront and chase the debtor themselves, effectively solving cash flow problems.

Factoring services will typically charge around 5% of the total invoice amount.

 

Plenty of companies have gone under despite making lots of cash, simply because they overreach on costs or can’t keep up with their own growth.

 

Make sure you’re profitable

There’s a shocking percentage of companies that operate without much margin of profitability. When you grow fast, reinvest profits and have high costs, cash flow can soon become a problem. Finding new avenues of revenue to improve your net income while using your current resources, means that you can mitigate and increase your cash flow.

Spotting opportunities for profit can seem difficult, but something as simple as reviewing prices, offering project work or consultancy services can mean profitability returns.

Plenty of companies have gone under despite making lots of cash, simply because they overreach on costs or can’t keep up with their own growth.

It’s a good idea to review business operations for the long term. The amount of business cash flow you can add by simply reconsidering services is going to make a huge difference to your bottom line.

 

Be bold with loans

When applying for loans and credit, it’s always best to overreach in terms of how much you borrow. Taking only what you need can leave you with little room for manoeuvre and slim margins for error.

Aim to borrow 25% more than you need and use the surplus as a cushion when it comes to tight pinches. For example, a gap between a big payment arriving and wages having to be paid can impact hugely on the monies available to cover the time in between.

Having that extra bit of comfort can make all the difference.

Companies should also be aware of the sheer amount of business support from various organisations too, especially if they are a growing SME. Government schemes can be very lucrative, and region-specific support can see a business through tougher times.

 

Charge what you’re worth

A cardinal sin that many businesses simply don’t consider and are guilty of in the extreme is not knowing their own worth. This can range from not charging enough for products to not valuing their time correctly.

Businesses need to act like businesses and not as charitable institutions if they are to maintain a profit. There’s often a negative gulf between what a company thinks it is worth and the potential for what it can actually command.

Pressures on selling for a competitive price can sometimes overrun the fact that quality of product or service can often mean more in terms of value to a client or customer thanks to your expertise and knowledge.

Devaluing your hard work and efforts can mean a company can fall into bad habits. Breaking out of the limitations that companies sometimes place on themselves can be incredibly freeing and even unlock new revenue streams that were previously hidden.

 

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 using a Time To Pay Arrangement.

 

 

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.

 

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.

 

 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.

 

Common reasons behind poor cash flow

There are many factors that can push a business into having cash flow problems. Among them, the examples below tend to be an issue in more cases than not. If you recognise any of the following issues in your business, you’d be wise to take action to counter them as soon as possible.

 

It is so important to put a few hours aside to work ON your company rather than IN your company

 

Bad debts

Cash flow problems often stem from bed debts – those debtors that can’t be recovered.

Unfortunately, many of our clients have come to us after unpaid debtors books have led to defaulted payments on their behalf; things do spiral quickly if action isn’t taken.

Companies should have credit control systems in place to collect any money that is owed in from customers. We are in no doubt that prioritising the efficiency and effectiveness of this system is important, especially when the company is in its infancy.

Honestly, this is easier than it sounds – as long as your business keeps its books up to date, which it always should – the process is straight forward.

Many companies simply need to set aside some time to administer reminder emails and letters, and to pass anything overdue to recovery firms in a timely manner.

Bad debts can quickly lead to cash flow problems, and in our experience, credit checks on customers that are being offered credit are usually a must.

This doesn’t mean that you have to refuse their custom if their credit record is poor, but measures can be put in place such as deposit requests or partial invoices if this is the case.

 

Forecasting (or a lack of it)

Cash flow forecasts are essential for any new business. Your accountant can compile this for you so it shouldn’t use up any of your time.

The fluctuation of cash from month to month can be predicted to enable you to estimate how much cash you will need to survive over the next year or so – obviously, this is key to avoid cash flow problems.

The further down the line you are the more accurate your cash flow forecasting will become; this is because comparing actual figures to predicted ones will bring insight and, of course, enable you to adjust the figures so that they are more accurate going forward.

Investigating the reason for any discrepancies will achieve this – if you discover that you are spending more than you had thought on your utility bills, for example, you could look at your energy efficiency and whether other providers would be cheaper.

After the initial period, your forecast will be robust enough to aid decisions such as expense cutting or novel investment spending.

 

Lack of organised bookkeeping

There is lots of information out there on the initial start-up costs of various businesses, but little about the working hours that an individual needs to put in for the first months and years, which are usually verging on the ridiculous.

Unfortunately, we have found that many of our clients have neglected their bookkeeping in the initial stages, because they have found themselves having to be a one-man-band.

Many directors simply feel that they don’t have enough hours in the day and assume that they can catch up with this later.

This is often the root cause of cash flow problems – the sooner you catch an issue, the more likely you are to be able to rescue the business, and how can you expect to be aware of any snags if the company books aren’t complete?

It is so important to put a few hours aside (we recommend one day a week) to work ON your company rather than IN your company.

Many that we have worked with have unfortunately needed to close their companies simply because they had not noticed that payments were overdue or inconsistent invoices were being sent out due to poor bookkeeping.

As long as you have caught the issue in time, there are things that can be done. We have found that using a robust accounting system is the best way to get company books in order, and of course someone needs to allocate time to keep this up to date.

Trust us, it will be worth it once a strong cash flow is in place and no more red letters are falling on your doorstep. The next step will be to generate useful reports to enable you to understand your company’s cash flow in simple terms.

 

Fast growth

Growing your business too quickly can unfortunately hurt the business by causing cash flow problems. Of course growth is positive, but if the company cannot keep up with it then things can quickly spiral out of control.

This doesn’t mean that you should always stay in your comfort zone or refuse business, but when taking on custom that will incur more than your company’s usual costs, these should always be worked out prior to agreement.

Seeking a bank overdraft or short term loan will usually cover the shortfall, and is easier to achieve than you may think. More often than not, showing a letter of intent or drafted contract to the bank will allow them to lend the cash that the business needs to hire those extra staff or order stock in bulk, for example.

This will mean that credit terms can still be offered to the customer and the job will go ahead without a hitch – there is nothing worse than angry staff when there is no cash in the bank come payday.

The debt can be repaid as soon as the customer has paid, so interest will only be paid on the amount of time that you needed.

 

Profit problems

A lack of profit will of course lead to poor cash flow. Consistent profit losses will ultimately lead to the failure of a business, but the time that it takes to come to this will depend on a few factors.

Companies can survive without profit for a while if they have cash reserves as a result of previous profits, but unfortunately it will eventually catch up with you, no matter how many savings your company has.

We would hope that you will immediately be aware if your business is not making a profit, and it is important that the underlying problems are addressed with urgency.

Any measures taken should either increase sales figures, price or lower costs.

 

Credit term issues

Another problem that we have found at the root of cash flow problems are customer credit terms which don’t line up with the suppliers’ credit terms. These issues can quickly spiral into poor cash flow to the extent that company bills can’t be paid.

Misaligned credit terms could mean that your supplier is demanding payment within 12 days, but you have extended 20 days of credit to your customers. It’s not hard to see that cash flow problems could soon build up from this scenario.

 

Not getting paid on time

If the situation is just a case of people not paying their invoices on time you could look at invoice financing.

As you raise your sales invoices and send them to your clients you also provide a copy to your invoice finance provider. They will then make a payment to you of up to 90% of the invoice value straight away. The balance, less charges, is paid when your client settles the invoice. This can ease any cash problems very quickly.

 

Preventative steps you can take to avoid cash flow issues

Solving cash flow problems is all well and good, but to ensure that your finances are in a healthy and robust state, you need to know how to avoid them in the first place.

Implementing some of the solutions below won’t guarantee that you steer clear of cash flow issues, but they will ensure that your company is in the best place possible to avoid potential problems.

 

Cutting costs will benefit any company’s cash flow position

 

Improving business cash flow

It’s easy to ignore cash flow as something that you can palm off on your accountant or not think about until it rears its head in annual financial statements, balance sheets and reviews.

However, there’s something to be said for keeping a keen eye on it on a monthly if not weekly basis. It’s the lifeblood of a business running successfully.

To just not pay attention to cash balances seems irresponsible and short-sighted. So here’s some tips that could mean you are paying off debts, saving ahead for periods of turbulence and not coming up against threats that could have been avoided when it comes to cash flow.

 

Avoid scope creep

Scope creep is one of the most dangerous aspects of business to exist and more companies need to be aware that it can severely damage cash flow. Once a project or contract has been agreed, there is a lot to be said for sticking to one’s guns.

Allowing a project to become distorted or not what it was originally set out to achieve can mean resources and hours are poured into a client or a service that simply provides no extra revenue.

For example, a company hired to perform payroll services are slowly brought in to also cover HR or other related aspects of a business. If no recompense is sought or contracts are not reviewed, this can result in a downward trend.

This is a trend that can cost dearly and so remaining focused on what the deal brokered entails can save a company down the line if things start to stray from the initial agreements.

 

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.

 

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.

 

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 – read our article on how to hoard your cash here.

 

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.

 

 

Do the basics well

It’s remarkable how easily companies can be blind-sided by a lack of liquidity, despite hitting or even exceeding their sales targets.

Your business’ monthly costs are less than its monthly sales, so everything’s fine, right? Unfortunately, the reality can be much less comfortable.

Below are 4 key steps to managing your businesses cash flow in a better way and how to make sure you keep on top of it.

Remember, if you extend credit to your customers by invoicing them, you may need upfront cash to offer them products or services before you have been paid, so while calculating profit per unit is useful, it can be easy to run out of cash to fulfil the orders you have taken on.

Company bills or employees will not wait for your customers to pay up, so planning ahead is essential.

Keeping cash flow management under control will not only keep your business afloat, but will also gain the bank’s trust in a situation where growth is thriving and you need to borrow capital from them.

Following these four simple rules will ensure that you know the state of your business’s cash flow at all times, enabling you to react accordingly and continue to make wise and profitable business decisions.

 

1. Increase sales/income

• Particularly those involving cash payments. Use promotion if you can.
• Make observation of what sells best, then maximise on that potential.
• Look at the possibility of selling at a higher price point.
• Become more selective when granting credit.
• Seek deposits or multiple stage payments.
• Invoice promptly, be sure to chase non-payments.
• Add late payment charges or fees where possible.

 

2. Reduce direct and indirect costs

• Use the 80/20 rule to control stock, debtors and creditors.
• Negotiate extended credit from suppliers.
• Make prompt payments only when worthwhile discounts apply.
• Sell off or return obsolete/excess stock.
• Defer or re-stage all capital expenditure.

 

3. Optimise and become efficient

• Put off projects which cannot achieve acceptable cash returns in a decent time frame.
• Use reports and forecasts to understand the business.
• Ensure staff are trained and performing well.
• Use alternative financing methods, such as leasing, to gain access to the use (but not ownership) of productive assets.
• Negotiate payable fees or contract obligations.

 

Set a debtor’s book limit appropriate to your business’ capacity

 

Chase invoices quickly

Everyone wants their business to grow. The faster your firm grows, however, the more finance you will need to retain sufficient liquidity, as more orders cost more cash.

This paradoxical fact catches many directors out, and the first step to avoiding this is to ensure that invoices are paid in a timely manner.

Every business will have a different timescale put in place depending on the service they offer. As an example, these steps could be followed:

• Chase invoices by post 2 weeks after they were sent
• After 30 days, send another payment reminder
• Still unpaid? Chase up by phone
• Repayment plans may be offered at this point
• Debtor information should then be passed to a solicitor if their debts are still not paid. They are able to threaten legal action on your behalf and begin proceedings for CCJs (County Court Judgements).

You should be aware of the amount of debtors you have at any given time; keeping cash flow in mind will help to keep your business operating day-to-day.

It is advisable to set a debtor’s book limit appropriate to your business’ capacity. Once this limit has been reached, you could ask new customers to pay in advance.

Another option is to invoice for a percentage of the fee upfront for some or all of your customers.

 

Be aware of the processes taking place

Whoever you delegate accounting tasks to, any business decision you make should be according to the cash flow projections that have been made.

Following a few simple rules could make the difference between success and failure:

• Check the bank account daily
• Communicate with the bookkeeper on a regular basis
• Track cash flow every month

Ensuring that you educate yourself to know what you are looking at will alert you to the important figures.

Some examples are figures that appear (and, of course, are) good for business, but may not be good news for cash flow figures.

For example:

• Business-to-business sales. While companies may be some of your best customers, they tend to take longer to pay up than an average micro business’ debtor, which is generally due to the fact that they will be selling the goods on at a later date.
• Receivables. These are goods supplied by your business that have not yet been paid for.
• Inventory. Ultimately, products that have been produced and turn into inventory (as they have not yet been sold) is cash flow lost, especially as they may cost money to store.

 

Use appropriate software to keep track

There are plenty of options for keeping your cash flow figures easily accessible and updated.

Every business has different needs, but the main figures you should aware of include:

• Collection days (how long you wait to get paid)
• Payment days (how long it takes you to pay your suppliers)
• Inventory turnover (how long it takes to sell inventory)

Using decent software can be crucial in saving you time and money. Ensuring that the information you’re reading has been updated makes certain that you don’t waste any time chasing creditors that have already paid up, for example.

Crucially, you may think that you are aware of your company’s cash flow status without looking at the figures in detail, but this isn’t a process you can do in your head.

Remember that ‘sales’ doesn’t equal ‘money in the bank’ and, likewise, ‘expense’ doesn’t equal ‘paid for’.

 

Plan ahead

Planning in advance for seasonal spikes will ensure that you have enough cash to continue trading all year round.

For example, don’t place any large orders with your suppliers and leave yourself with limited cash flow even if you have just received several orders from customers, as they may take some time to pay.

Be aware of the bills your business is responsible for. If you haven’t retained enough cash, just one late debtor payment may mean that you’re late paying bills yourself, which is likely to incur fines and can spiral out of control very quickly.

When at all possible, ensure that you have enough money in the bank so that the bills are paid straight away.

Estimations can be very useful for later troubleshooting. Start by asking yourself what your company’s cash flow will be 6 months from now.

Are you guessing or are you taking everything you should be into account? Projecting the important cash flow figures (some of which are mentioned above) 12 months in advance, then later comparing this plan to what actually happens can help your understanding tremendously.

It is easy to overestimate cash flow projections, and noting anything that had previously been overlooked will help you to keep on top of your cash flow, and of course project future figures with more accuracy.

If your business’ cash flow is under control, you are likely to be free from stress and worry.

Making sure that you have all the information you need will help to ensure that what you are doing is focused on improving the company.

 

Overcoming problems arising from a lack of business cash reserves

Even the best businesses can suffer from cash reserve problems at some point. For many businesses it can be a fine line to walk between getting payments on time and being able to pay their suppliers on time.

Most of the time, these cash flow problems are just short-term issues and you are able to move past them quickly.

Your suppliers may even agree to extend the length of their credit from 30 to 60 days in some cases. However, if you’re late paying invoices on several occasions, alarm bells will start to ring.

If you fail to meet the agreed upon payments with your suppliers and have already started receiving final notices, it’s time to take immediate action.

It’s always better that you take action yourself rather than let a supplier take action against you. While there may be some difficult decisions to make, the sooner you address these problems, the better.

If your business is dealing with large amounts of debt, you can speak to you accountant or bankruptcy lawyer to determine if your business is technically insolvent and what can be done about it.

There are several different routes that you can go down depending on whether you want the business to carry on or stop altogether.

 

Can your business be profitable again?

If you believe that your business has the chance to become profitable again, consider a Company Voluntary Arrangement (CVA) if you’re a limited company or an Individual Voluntary Arrangement for sole traders.

Under these arrangements, a contract can be drawn up between you and your creditors, establishing more time to pay.

Entering into a CVA will give you additional protections from further pressure from your suppliers, assuming that you keep up with payments.

 

Is it time to close?

However, in the event you don’t believe it is financially worth it to keep running your business, then you may want to consider a creditors voluntary liquidation, whereby your company stops trading and an insolvency practitioner will sell off your company’s assets to raise the money needed to pay off your creditors.

If there are no assets in the company then another route may be administrative dissolution, where a company is closed using specific rules in the companies act.

 

 

Need help solving cash flow problems?

If your business is experiencing cash flow problems then you are not alone, especially if you are still within the first few years of your company incorporation.

These first years tend to be a huge learning curve for most directors, and cash flow issues can be quite common among them.

It’s not just new companies that can quickly find themselves in financial dire straits as a result of poor cash flow, though. Any business can be threatened by poor cash flow, and many have. History is littered with newly formed SMES and well-established global corporations alike falling foul of cash flow problems.

Forbes Burton have helped thousands of businesses just like yours in solving cash flow problems. Call us on 0800 975 0380, or email [email protected] for a free consultation to see how we can help your company.