Company Cash Flow Problems and How to Solve Them

What is a cash flow problem?

A cash flow problem is simply when there is not enough money coming in to pay for outgoings such as rent, wages and suppliers. So the “flow of cash” is in the wrong direction.  This loss of liquidity can eventually result in the business becoming insolvent even if it is making profits “on paper”

What are the common causes?

• Poor financial record keeping and ineffective cash flow management
• 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 raising of invoices and late payments
• Declining sales
• Unexpected bills/refund requests
• Over-reliance on a small number of customers
• High overheads
• Inexperience and naivety
• Poor credit control procedures and credit checks

An interesting article by accountingweb.co.uk highlights how financial directors will need to be plan and predict possible cash flow problems.

How can you prevent and solve cash flow problems?

1. 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.

2. 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.

3. Raise prices

   In business you must work to get a good price for your product/service otherwise what is the point!  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?

4. 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 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 IT’S YOUR COMPANY’S MONEY so be sure to chase it up!

5. 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.

What types of businesses are prone to cashflow problems?

Any business that  has to buy in expensive parts, labour, equipment etc to carry out work before they are paid in full are prone to cashflow problems.  The most obvious one is construction. It is no coincidence that the construction sector has the highest insolvency rate.  This is despite payments being made during building projects. There is also the risk of disputes due to complex contracts.

Other companies that invest alot of time for a big payday in the future can also have cashflow issues.  A good example of these types of businesses are

• Lawyers in litigation
• Technology and Software Development
• Import Export
• Recruitment and Headhunters

We have a number of guides for lawyers who might be suffering cash flow issues.

What options are available to companies that cannot solve 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.

Pre-pack Administration

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.