What is company cash flow?
Cash flow, put simply, is the movement of money, in to and out of a company’s bank accounts. When cash flow is ‘good’, it means there is enough money coming in to cover the money going out. It is when there is not enough money coming in to cover the cash required to pay for outgoings, 'poor cash flow' that you should start worrying – even profitable companies can experience cash flow problems (see the video below).
What are the common causes of cash flow problems?
- Poor financial record keeping and ineffective cash flow management (overtrading)
- Over leveraging your business. i.e putting too much borrowed money in.
- Agreeing to high-interest-loans
- Seasonal highs and lows – what is your seasonal cycle?
- Late creation of invoices and late payments
- Declining sales
- Unexpected bills/refund requests
- Over-reliance on a small number of customers
- High overheads
- Inexperience, greed and naivety
- Poor credit control procedures and credit checks
- Extending too long a line of credit
Below is an interesting video on how high growth and profitable companies can have cash flow issues
How can you prevent and solve cash flow problems ?
- Know your cash flow inside out, be aware of the most up to date position.
See our free cash flow template , for an easy, reliable, speedy and helpful tool. Updating and reviewing this daily will allow you to notice any incomings and outcomings – if you notice you have a future deficit of cash flow, then you can call in turnaround advisors like ourselves, on 0800 970 0539, who can help you to prepare and have a plan in place.
- Cut costs.
This should be planned carefully – do not just cut away at everything! Assess the business and question each expense - What expenses are not as essential? Do you need to be in a high rent location? Or could you move to a cheaper location? Employees can be a large expense– do they do too much overtime? Similarly, put the pressure on suppliers and encourage them to offer a better deal to save you money, as they want to keep your custom.
- Raise prices.
As harsh as this sounds, in business you must work to get a good price for your product/service otherwise what is the point! Generally, the higher the better (dependent on the type of product or service). You should take into consideration the effect a price rise would have on customers. What is your price elasticity? If a slight price increase would push customers away to competitors and lose their loyalty, is it really worth it? You can also negotiate better deals with suppliers to get a better price, which in turn improves gross profit margins and cash flow.
- Have a good invoicing system.
Invoice daily if you can – the quicker you invoice, the quicker your company gets paid. Similarly, use invoice factoring or discounting. Once you raise an invoice, you can draw down up to 70% of the value, straight from the factor. Use systems such as MYOB Xero, Sage and Quick books to see who owes money to the company. Cash can then be drawn down quickly. A day after the payment is due, remind the customer they need to pay via a letter, email or call. Then phone every day until you get paid – using automatic reminders on your accounting system if needed… remember ITS YOUR COMPANY'S MONEY so be sure to chase it up!
- Liaise with suppliers
Do not allow red letters to multiply. Using a cash flow forecast will show in advance when your company cannot pay its bills. When businesses have to change their payment terms, suppliers start to get upset. You should offer to pay something on account until you know the whole bill can be paid. If this is not done you may face legal action for non-payment or become personally liable.
What options are available to companies that cannot solve immediate cash flow problems and face insolvency
If your issues are too severe and cannot be fixed by cutting costs etc as described above and creditors are pressing then there are options.
Plan A or time to pay
If creditors are threatening legal actions, it’s worth looking at what we call, Plan A. This is an informal deal with creditors as a way to pay back debt over a relatively short time period. We may be able to arrange a Time To Pay (TTP) deal with HMRC on your behalf if you've fallen behind on VAT and PAYE payments.
Company Voluntary Arrangement (CVA)
Similar to Plan A, a CVA is a formal deal made with creditors to ensure debt is repaid over a set time-frame. The arrangement protects your company from legal actions and is a powerful restructuring and refinancing tool. Unlike a Time To Pay deal, up to 60% of unsecured debt can be written off. For a detailed CVA guide, click here.
If the company is under threat from an aggressive creditor, selling the company in a pre-pack administration deal to a third party may be the best option. This ultimately gets rid of debt and allows the business to continue. It can end those sleepless nights quickly! Read our step-by-step guide here.
Categories: Implications for Directors
Worried about poor cashflow? Covid-19?, How to pay wages on pay day? For expert advice on a range of issues download our free Ultimate Guide For Worried Directors today. Or just call us on 0800 9700539
Please note that the guide includes updates due to Covid-19 For instance there have been some changes to insolvency legislation that limits creditors actions and relaxes rules regarding wrongful trading. A new 20 day moratorium for distressed businesses has also been introduced.