What Can We Do About Company Cash-Flow Problems? - Business Expert
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In this guide, we’ll take a look at what you can do about company cash-flow problems, how they’re caused and the potential impact they can have on your business. 

If you have more money going out of the business than you have coming in, you could have a problem. If this is only temporary, perhaps due to a seasonal dip in sales or a one-off purchase, this is an issue that should be easily resolved. However, if you consistently struggle to pay your staff or suppliers, make debt repayments when they become due or buy new stock, you need to act now. 

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What Are Company Cash-flow Problems?

A cash-flow problem exists when a business does not have enough cash to cover its short-term costs such as employee wages, debt repayments and restocking. Cash is king is a common saying in business for good reason. Your business could be generating a healthy profit, but if you don’t have enough cash, you’ll struggle to operate effectively.

Why Are Company Cash-flow Problems So Serious?

Cash-flow problems are one of the most commonly cited causes of insolvency for UK companies. A business becomes insolvent when it is no longer able to meet its financial liabilities. Although this is not necessarily the same as having cash-flow problems, the two are very closely linked. 

If identified and acted upon early, cash-flow problems can be nipped in the bud before they become an issue as serious as company insolvency. However, it’s often the case that the warning signs of cash-flow problems are ignored or company owners and directors are in denial about the extent of the problem. If the underlying issues that are causing the cash-flow problems are not addressed quickly, insolvency is commonly the conclusion. Then, the biggest worry for directors is being issued with a winding up petition by a creditor that could close the company down.  

Why Do Businesses Have Cash-flow Problems?

There are lots of different reasons why businesses may have more cash going out of the business than they have coming in. Common causes of cash-flow problems include:

  • A surplus of uncollected invoices
  • Declining sales
  • Holding too much stock
  • Growing the business too quickly
  • Over-relying on a small number of customers
  • Expensive debt
  • Ineffective cash-flow management
  • High overheads
  • Seasonal dips in sales
  • Having little or no cash reserves
  • Insufficient profit margins
  • Poor credit control procedures and credit checks 

Identifying the cause of a company’s cash-flow problems can be challenging, as company owners and directors are often too involved in their day-to-day responsibilities to see the bigger picture. That’s where the assistance of an experienced team of insolvency professionals can help. 

Can A Company Be Profitable And Still Have Cash-flow Problems?

Absolutely. Businesses that are profitable and growing rapidly can be particularly susceptible to cash-flow problems because of the risk of overtrading. Typically, this occurs with smaller businesses that do not have the financial resources to support such a quick expansion. The cash quickly dries up and the business is no longer able to pay its suppliers or other creditors and the business grinds to a halt. 

Late payments can also push profitable businesses into a cash-flow crisis. That’s particularly the case where a business has a small number of large customers. If one of those customers fails to pay on time, the business can quickly become insolvent. This is where access to short-term funding can make a big difference. 

What Is The Impact Of Cash-flow Problems?

Insufficient cash-flow can cause a number of significant problems in your business, which, if left unchecked, could bring about its demise. Some of the most common effects of poor cash-flow include:

  • You’re unable to pay suppliers – This can damage business relationships and affect your ability to satisfy customer orders on time. 
  • Debt repayments are late – Failing to make debt repayments on time can impact your business’s credit score and affect your ability to access affordable finance in the future. If this continues, you could face legal action or insolvency.     
  • You’re unable to buy new stock – If you don’t have the cash to buy new stock or raw materials, your income will take a hit and your cash-flow will fall further.  
  • You can’t afford to pay the staff – An inability to pay staff wages is a sure sign that your business is in trouble. The consequences include reputational damage and problems hiring and retaining staff in the future.
  • You lose contracts – If you can’t pay your staff, buy stock or pay your suppliers, you could soon start losing key contracts. Creditors may take legal action against your business to recover the money they are owed.      

Initially, if you explain the reason for the late payment and tell your creditors when it will be made, the consequences may not be too severe. Some suppliers may charge interest on late payments, which will increase the amount you owe. However, as the situation drags on and promises of payment are made and not fulfilled, the supplier will become increasingly frustrated, and their own business could be at risk. 

This is when the pressure you are facing will ramp up. You should expect regular calls and emails from the supplier, culminating in final demand letters and threats of legal action. If payment is still not forthcoming, the creditor will be left with little choice but to take legal action to recover the debt. That could be in the form of a county court summons. If the court finds it in your supplier’s favour and still no payment is made, a county court judgement will be made against you, and enforcement action will be taken to recover the debt.

The creditor could also issue a statutory demand against your company as long as the debt is £750 or more. If still no payment is made, the supplier may then issue a winding up petition that could lead to the compulsory liquidation of your business. For that reason, if you do receive a statutory demand, it’s not something you can ignore.  

What Can We Do About Company Cash-flow Problems?

Identifying company cash-flow problems is the first crucial step in resolving the issue. Your next job is to find the right solution for your business. 

(1) Know your business’s finances inside out   

If you are going to maintain a healthy level of cash-flow, you need to have a clear picture of all your incomings and outgoings now and in the future. You should analyse your expenditure to see which costs are fundamental to the business’s success and where savings could be made. 

Creating a cash-flow forecast that you update and review daily will give you complete visibility of your incomings and outgoings and allow you to identify future cash-flow shortages before they become a problem. A cash-flow forecast does not need to be a complicated document. Simply keeping a spreadsheet that lists your income and outgoings is sufficient. This should include all of the fixed and variable costs of the business. All projections must be realistic or you’ll be wasting your time. 

Here’s a simple cash-flow forecast template from the Association of Chartered Certified Accountants.

(2) Cut your costs

Once you have full visibility of your business’s expenses, it then becomes much easier to identify the essential and discretionary costs. You might think cost-cutting requires dramatic changes, but in many cases, simply moving to the best utility tariffs and checking you’re getting the best deal from your suppliers can lead to significant monthly savings. Other cost-cutting techniques include:

  • Reducing overtime or making non-essential staff redundant
  • Cutting back on miscellaneous spending
  • Reducing your marketing spend
  • Exploring whether different forms of advertising could be more cost-effective
  • Using cloud computing rather than paying for software licenses
  • Avoiding non-essential travel
  • Buying second-hand equipment
  • Holding less stock
  • Outsourcing non-critical tasks

(3) Speed up the invoicing process

Slow payments from customers are the scourge of small and medium-sized businesses, but often they don’t help themselves. 

The quicker you invoice, the quicker you get paid. Invoicing clients at the end of the week or month creates delays in the payment process which could easily be avoided. You should send out invoices as soon as the work has been completed and check with the recipient that the invoice has been received and the details are correct. Business owners can use accounting software to automate much of the process and avoid unnecessary payment delays.

(4) Increase your prices 

In business, you want to sell to the most customers at the highest possible price. In most industries, if you raise your prices, the number of sales you make will fall, but the sales you do make could generate more income and ease your cash-flow problems. 

Before making any decisions, take a look at the prices your competitors charge for similar products or services and consider what impact a price rise could have on your customers. If your prices are already on a par with the competition, an increase could push your customers away.  

(5) Negotiate better deals with your suppliers

When was the last time you renegotiated pricing with your suppliers? Everything is negotiable and faced with the risk that they might lose your custom, there’s every chance that an existing supplier will be willing to offer you a better deal. Before you go to the bargaining table, make sure you’re prepared. Get quotes from other suppliers and use this information to your advantage. 

If your supplier is not willing to negotiate on price, think about other areas that could benefit your cash-flow. For example, could they provide longer credit terms or discounts on bulk orders or early payments? If they’re not willing to budge, be prepared to go elsewhere.

(6) Improve your stock management

When it comes to cash-flow, keeping a close eye on your stock is just as important as managing your business bank account. The philosophy of ‘the bigger the range, the better’, has been disproven time and time again. Instead, you should monitor your inventory regularly and only order stock as and when you need it.

Depending on the type of industry you operate in, it can be beneficial to understand the average amount of time you hold stock for before you sell it. Decreasing the amount of stock you order and the time you hold it for will free up cash-flow and reduce the costs associated with storage and wastage.   

(7) Tighten up your credit control

The late payment of invoices by customers is one of the leading causes of cash-flow problems. Although some industries, such as construction and manufacturing, are particularly blighted by late payments, it’s a universal problem, with UK SMEs currently chasing more than £50bn.   

Improving your credit control processes and prioritising the collection of monies owed will help to maintain a positive flow of cash through the business. There are many ways this can be done:

  • Make your terms and conditions clear from the outset
  • Reduce the amount of time you give customers to pay
  • Credit check customers before you agree to do business with them
  • Invoice quickly and accurately
  • Offer discounts for early payment
  • Offer multiple methods of payment
  • Charge interest on late payments
  • Automate the collections process so you’re notified when a payment is late
  • Contact customers as soon as a payment is overdue

(8) Explore your short-term funding options

If your business is growing rapidly or you’re going through a lean spell and need an injection of working capital, seek access to a line of credit. A bank overdraft or short-term loan, or a form of alternative funding such as invoice finance, could free up the cash you need to continue running your business effectively. 

Invoice finance is a short-term form of funding that’s becoming increasingly popular. It allows businesses to access up to 90% of the value of their invoices within 24 hours of the invoice being sent to the customer. Invoice finance provides funding against a business’s entire sales ledger, but single invoice finance, also known as spot factoring, allows a business to release the money tied up in individual invoices. That can provide a cash-flow boost as and when it’s needed.  

 (9) Talk to your creditors

If cash-flow problems prevent you from making prompt payments to your creditors, it’s only a matter of time before they start applying pressure to make you pay up. That will start with emails and phone calls but can quickly lead to threats of legal action. 

To keep your creditors onside during a cash-flow crisis, you must communicate with them regularly. By explaining the position you find yourself in and your intentions to make the payment, you will be able to preserve and in some instances even strengthen the relationships you have with them. 

As an example, if you ignore an outstanding tax bill, HMRC will apply late payment penalties and add interest to the amount you owe. By contacting HMRC before the payment is due, you could negotiate a time to pay arrangement. That will allow you to spread the payment over a longer period and avoid the late payment charges and the potential legal action HMRC can take. 

If there’s no immediate solution to your cash flow issues on the horizon, then you could consider making an informal arrangement with your creditors to repay the debt over time. 

Informal arrangements can be attractive because they do not cost as much to put in place as formal insolvency procedures such as a company voluntary arrangement (CVA). However, on the downside, they are not legally binding, meaning your suppliers could back out anytime. Unlike a formal arrangement, interest and charges continue to be added to the debt and will need to be repaid.    

However, if your company has a serious problem with short-term cash flow but you believe it is viable and will be profitable over the longer term, a formal arrangement like a company voluntary arrangement (CVA) could be the right option for you. 

A CVA is a legally-binding payment plan between your company and your creditors, including your suppliers. It will allow you to make manageable monthly debt payments for between two and five years to repay your debts while continuing to trade. All interest and charges will be frozen at the time the CVA is agreed and your creditors will not be able to take legal action against your business while the arrangement remains in place. 

(10) Avoid overtrading     

Business owners get very excited about growth, and rightly so. Growth means bigger clients, new opportunities, higher revenues and more employees. However, overtrading, which involves taking on more business than the company can support, is a common cause of cash-flow problems. 

In the short-term, companies can access short-term financing to address this issue, but in the longer-term, business owners must get used to monitoring and moderating their growth. That means having the discipline to turn customers away if you are experiencing a cash-flow shortage.

What To Do If Your Company Is Insolvent

If your cash flow problems are permanent, your business is insolvent, and has no reasonable prospect of making a recovery, it should cease trading. Continuing to trade under these circumstances is only likely to worsen the position of creditors and increase the risk of serious repercussions for the company directors such as personal liability issues.

If the company still has a realistic prospect of repaying the debt to its suppliers and other creditors in full, then it can continue trading, but it should only do so if it’s in the best interests of the company’s creditors as a whole. This is a complicated area, so if you’re worried that your business could be close to insolvency, you should contact our team immediately. 

Creditor’s Voluntary Liquidation

If your business is insolvent and does not have a viable future, the best way to protect your suppliers’ and your own interests could be to close the company down. 

In a creditors’ voluntary liquidation (CVL), a licensed insolvency practitioner will be appointed to liquidate the business. They will value and sell the company’s assets to settle outstanding debts and bring an end to all business functions and processes before removing the business from the Companies House register. Any debts that have not been repaid during the liquidation will be written off. This will allow you to pursue new opportunities without worrying about the liquidated business’s debts catching up with you. 

Pre-Pack Administration

If you feel that the business is no longer viable in its current form but believe it could be successful with a few changes, you could enter into a pre-pack administration. This procedure will allow you to buy the assets from the old business before closing it down. You can then continue trading with a new business that’s free from the debt, leases and long-term contracts the old business had entered into. 

Although it may sound like your suppliers and other creditors will get a raw deal from this procedure, it’s usually the case that they receive a greater return than they would if the company was liquidated. It’s also possible that the new business will continue working with the same suppliers, so they will not lose an important customer.  

Restructure The Business Via Administration

If your suppliers or other creditors threaten to take legal action to put you out of business, one potential solution is to go into administration

Once the court has granted an administration order, your company will be protected from creditor legal action. A licensed insolvency practitioner will be appointed to act as the administrator. They will become the temporary CEO of the business and determine whether it can be saved and how the debts can be reduced to more manageable levels. 

How Can We Help?

We have a team of licensed insolvency practitioners who will help you find the best route forward for your limited company, whatever circumstances you are in. We provide a free initial consultation to discuss your options, protect your position and keep you in business whenever possible. Call 08000 24 24 51 or email info@businessexpert.co.uk today. 

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