For most businesses, cash-flow issues will arise at some point. Experts share three ways to get your cash flow back in check.

Entrepreneurial businesses face a cash-flow crisis from time to time – whether it’s because of client’s delayed payments, expenses have got out of hand, or simply a lack of profit. Here’s how to get your business back on track.

1. Identify the problem

Late payment is one of the most common causes of a cash-flow crisis. “It’s quite often the case that the finance team have failed to let management know that your two biggest clients haven’t paid you for six months,” says Chris Chapman, business adviser and founder of financial consultancy Numitas. But there are other reasons why a bank account can look dangerously barren. One is overtrading: a sudden influx of orders means you commit to spending money on creating the product/service to fulfil these orders, even though it might be months before you get paid. Other things like overspending when setting up the business and forgotten VAT bills might be an issue, too.

New business owners regularly underestimate expenses, says Colin Garvie, assistant professor of accounting and finance at Edinburgh Business School. “They just don’t think it through if they’ve never run a business before,” he says, adding that bank charges, interest payments and corporation tax are among the things that are often overlooked.

FriPura, whose product can reduce the amount of fat in chips, was able to avoid a potential cash-flow crisis thanks to careful forecasting – something it was committed to from the start because of high launch costs with low initial returns. “We initially rented a warehouse and used this as our distribution centre,” says Dom Wilbraham, commercial director. “It was a large cost, and as the workload was increasing we could see we would need to hire people, too.”

To avoid plundering the bank account, Wilbraham sought alternative solutions and found the best to be a ‘pick and pack’ service in which he could reduce both warehouse and staffing costs. “We’ll look at it again as volumes increase,” he says, “with our cash-flow forecasting as a guide.”

2. Work out how to survive in the short term

Your most pressing issue is to make sure you don’t run out of cash, and often a bank loan is the quickest way to avoid this. “I would never ignore the bank,” says Chapman. “If you keep a good relationship with them, then when you have a spot of trouble – and as long as you can demonstrate that this is just a blip – your bank can often help out.”

Chapman also suggests looking at claiming R&D tax credits that you may be eligible for, as well as factoring – where a lender will loan you the value of unpaid invoices for a fee. Think also about how long you’re giving customers to pay: 60-day terms might be very appealing to them, but can spell disaster for your cash flow.

“In terms of quickly boosting income from sales, one of the first things to do is refocus,” says Nelson Phillips, a professor at Imperial College London Business School. “Business owners tend to focus on trying to close ‘the big deal’, when in fact in the short term they’d do better concentrating on the things they can close the soonest. What’s in the pipeline that you can close next week?”

On a similar note, he suggests that existing clients are likely to be your best bet when it comes to rapidly generating new sales. “Try and figure out what you can offer that would be an advantage to them,” he says. “Maybe you can do the job more quickly than usual, or say you can put your best team on it. But avoid discounting, as it can be hard to get your prices back up.”

“A lot of businesses don’t learn from their mistakes; those that do tend to go on and prosper” Colin Garvie, assistant professor of accounting and finance, Edinburgh Business School

Next, look at ways to cut your costs. “Cutting operational spend, reducing investment activities and introducing flexible employment contracts are common ways to gain more control on cash-flow,” says Graham Dotchin, corporate finance associate at accountancy practice Tait Walker. “Think about why you’re incurring costs, and if it doesn’t drive short-term income, assess its importance.”

You can also try sitting down with your suppliers and asking to pay them over a longer period of time. Garvie offers some other emergency measures, not all of which he recommends – but all are options:

  • be ruthless with outstanding debtors
  • if manufacturing, cut production to meet only confirmed orders
  • sell surplus assets
  • ban overtime

3. Find ways to fix the issue so it doesn’t happen again

Surviving a cash-flow crisis means you have found a short-term solution, but it will also have flagged up weaknesses in your business that you can now take steps to iron out. For example, if it’s clear that you’ll regularly need to rely on invoice factoring, and that this will add 5% to your annual costs, you can attempt to reduce other expenses to compensate – or try and build these fees into your prices.

You may well come out of this cash-flow crisis with a newfound appreciation of the art of hard bargaining – from now on every penny will count, and your business will be leaner because of it.

“This is your chance to put smarter cash-flow forecasting in place,” says Garvie. “Realise you got it wrong, learn from the experience and make sure you isolate what the key issues were – so they don’t reoccur. A lot of businesses don’t learn from their mistakes; those that do tend to go on and prosper.”

Dotchin adds a final thought: “Running out of cash in most cases is the death of a business. For the directors, there’s also your fiduciary duty to consider and the legal implications of wrongful trading, which is when you continue to trade past the point you ought to have known that there was no reasonable prospect of avoiding an insolvency, and you should have taken every step to minimising loss to your creditors.”

It’s the ignominious ending that no SME founder wants – and cash-flow forecasting can help to prevent it from happening.

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