Cash is key. Within any business or marketplace, to run a successful business, there has to be a healthy level of cash flowing throughout the business. It doesn’t matter if you rule the market, you’re a big hitter or you’re a brand-new start-up, if cash flow is negative the business will be in trouble. Even if profits are strong and sales are through the roof, there could be one bad debt which sees the business slip into negative cash flow and a spiral towards closure.
Businesses are often underprepared to manage their cash flow and a common problem businesses face is simply not planning efficiently. So, what are the best ways of preparing a business to effectively handle cash flow?
Common causes of cash flow troubles
Creating and updating a cash flow forecast is a massively important part of preparing and planning a business model. Too often cash flow forecasts aren’t properly planned, leading to problems further down the line. A forecast has to include all financial aspects of the business, with all of the incomings and outgoings of the business well established. A cash flow forecast needs to include potential long-term effects of paying loans, quarterly or yearly tax bills, considering how long it could take to pay these back. Any business which relies on seasonal variations must also consider what the business needs to survive during the quieter months.
One of the common issues which massively effects cash flow within a business is late paying clients. If invoices are paid in late, it slows down the whole process of how a business operates. Even with lots of sales, if the value of the invoices aren’t being paid quickly and efficiently it can potentially stop a business paying its own bills.
I’m already in trouble – What can I do?
Invoice finance can be an excellent method of steadying the ship, but it is only available for B2B businesses. If it’s late paying clients causing the problems, invoice finance effectively allows a business to obtain an advance which is based upon the value of those invoices. A factoring company will normally lend you up to around 90% of the invoices value, after first assessing the quality of the invoices and the potential risks involved. If everything is ok, the factoring company will forward you the cash, before collecting it from the client, taking the money that they are owed along with their fees and then returning the change. The cost of factoring is similar to the kind of interest you would pay on a bank loan, but invoice finance is much easier to secure for struggling businesses.
Be effective with your incomings and outgoings
A cash flow forecast needs to be constantly evolving and changing to the circumstances of the business and the marketplace. There are some efficient ways of maximising the money which comes in and out of your business, which can just ease cash flow slightly. Staying on top of your finances is an easy prospect, however, in reality it can be much harder, unless dealt with professionally.
How can you be more efficient with incomings and outgoings?
- Follow up on late paying clients be assertive if they haven’t paid up
- Do credit checks on clients, assess their credit history and how good they are at paying
- Make it the business norm to collect upfront deposits from clients
- Make full use of outgoing repayment terms. If it’s better for cash flow to settle on the last day of a 30-day contract, do it
- If the business is struggling with cash flow and has regular suppliers, communicate with them and try to organise later payment dates
Credit checks on customers are massively important as it gives you the best possible indication as to how likely a new client is to pay their invoices on time. Looking into a client’s credit history is straightforward and easy to do, however, a good credit rating doesn’t always guarantee success. When a client doesn’t pay on time, there is nothing wrong with giving them a gentle nudge and asking for what you’re owed for. It doesn’t mean you have to be overly aggressive, but an email or a phone call is better than nothing.
Deposits can be a huge boost for a business, as it allows money to get into the business quicker, making it that bit easier to maintain a healthy level of cash. Although clients may initially be hesitant, it should be easier for them to pay over a set period of time rather than a lump sum.
In terms of your own outgoing payments, if you need too, then be smart with that money and take full advantage of your own repayment terms. If it would be useful for your business to pay at the end of the month, then make use of that option.
If cash flow is the major issue and the business is struggling, it might seem like a spiral of desperation you simply can’t get out of. Thankfully there are ways of restoring cash flow to a positive level and getting things back on track. However, it all depends on the circumstances surrounding your business and why it’s struggling in the first place. Sometimes closing your limited company can leave you in a better position for the future.
If it’s creditors getting on your back, a last rest option for getting things back on track is a phoenix company. Although a phoenix company is technically a type of liquidation, a phoenix company is perfectly legal and part of a pre-pack liquidation which allows directors to pick up the pieces from their formerly liquidated company and carry on under a new trading name.
Almost all businesses will undoubtedly struggle at some point. Even if you go through a rigorous planning procedure, problems will occur. The sooner a business can see them coming the better, however, if an owner finds themselves in a sticky situation, there are financial solutions to be found which can help get businesses out of trouble.