How To Tackle Cashflow Issues

August 16, 2017

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Managing and tackling insufficient funds is a challenge that many businesses will have to face — especially during the startup and growth phases.

So, let me begin by saying that there is nothing wrong with admitting that you are struggling to manage cashflow. In fact, the quicker you admit it, the more likely you are get out of trouble and return your business to firmer ground.

This article should give you a quick overview of what your options are if you’re trying to ride out a difficult time. Let’s crack on and discuss how to either prevent or manage cashflow problems.

Profit v cashflow

Too many businesses look at positive profit levels and think: “This is great! We’re making a profit so everything must must be going well.”

Unfortunately, focusing solely on profits isn’t good enough. If you aren’t also monitoring your cashflow, it’s easy to misjudge your position and run out of cash even though your accounts show profits.

I’ve seen many otherwise healthy and profitable businesses run out of cash simply because their directors didn't think about the cashflow position.

Startups and expanding businesses are especially at risk of running out of funds despite their accounts showing profits are being made.  Often they fail to consider or understand the funding requirements for the work they are taking on or in simple terms failing to consider the timing difference between paying out for wages, overheads and materials on a job at the customer/client isn't going to pay for until later.  This is especially true where smaller businesses get dazzled by the prospect of winning a potentially lucrative and substantial contract.

Realistic and honest forecasting

Forecasts are an incredibly powerful tool for business owners. Why? Well, good forecasts grant you a glimpse into future and predict where your business will be in several months down the line.

And why’s that important? Well, if you know where your business is heading, you can identify problems before they arrive.

For example, if you’re heading for a short-term funding gap, you can identify it several months before it arrives and secure funding from elsewhere.

Unfortunately, in my role as a business rescue specialist, I’ve seen far too many poorly designed forecasts. Some are overly optimistic, others are hopelessly vague and a few are the unaltered figures from an original business plan!

As your business grows and develops, you should revisit your forecasts and update them based on what you’ve learned. This keeps them as relevant and as useful as possible.

Also, always base your forecasts on past data. There’s no point forecasting a massive upswing in sales if you have no reason to believe that it’s achievable.

And if, when you review your forecasts, you find that your figures are unsupported, it’s time to throw them out and head back to the drawing board.

Credit control monitoring

In my experience, credit control is one of the issues small businesses struggle with the most. Small, often cash-strapped businesses not asking for payment from their customers?

It’s certainly strange but it’s something I see time and time again.

Here is some general advice to help turn your credit control into a strength, improve your cashflow and avoid running your bank account down:

First, have you determined who is in charge of credit control?

Small businesses usually have small workforces and that commonly leads to roles being doubled up.

Over the years, I’ve seen dozens of salespeople lumped with responsibility of credit control simply because they were already talking to clients.

This isn’t ideal!

Not only does it confuse the relationship between your sales staff and your customers, but it can lead to credit control being ignored as staff members concentrate on their original job specification.

If you have the budget, I strongly recommend you create a dedicated role for credit control. Having someone whose sole job is chasing unpaid bills means a crystal clear relationship with customers and allows someone to keep tabs on all your accounts.

Second, audit the credit terms you give your customers

Small business owners tend to maintain close personal relationships with their customers. While that’s good for business, close relationships often lead to stretching credit terms and that can cause havoc on your finances.

I recommend you evaluate your credit terms by comparing your credit terms to your competitor’s. Once you have a feel for the industry, bring your terms in line with the average offer.

For example, if all of your competitors offer 60-day credit limits, do you really need to offer 100-day terms? Does that extra 40 days actually attract customers or does it just disrupt your cashflow?

Most likely, your customers are expecting the industry average terms so there’s no point granting them more time than is necessary.

Also remember to compare the terms you give to your customers to the terms you receive from your suppliers. Most importantly, are the terms you grant longer than the terms you receive?

If there is a gap, you can find yourself struggling in a financial no man’s land waiting for cash to come in so you can pay your debts.

Third, take advantage of the contractual terms on offer to you

This process starts way back when you’re negotiating credit length terms with your suppliers. Push for a credit length that suits your business rather than settling for what’s on offer as standard.

When you are actually trading, use your credit terms to your advantage. For example, delay payments to your suppliers until they are actually due.

If you’re convinced that you will not be able to make a payment when it falls due, contact your supplier and ask to extend the credit terms. Suppliers obviously want to be paid back for their goods or services but they more often than not understand that driving your business to bankruptcy isn’t the most efficient way to do so.

Match funding and expenditure durations

For all businesses, but especially small businesses, it’s incredibly important to match the funding you use with the type of expenditure.

For example, don’t use an overdraft to fund the purchase of an asset. Overdrafts are repayable on demand and repayment can be demanded on the whim of your bank.

If you invest in expensive new machinery using an overdraft and your bank demands repayment within five days, you could struggle to find enough cash.

It’s also important to consider the duration of funding. For example, if you intend to fund long-term investment in a business, do not use short-term cash.

Just look at Northern Rock, which used short-term loans to fund aggressive long-term mortgage lending.

When the bubble burst in 2007 and mortgages began to fail, Northern Rock couldn’t cope with the high short-term cash repayments and it collapsed in spectacular fashion.

Alternative sources of finance

If conventional finance sources have dried up, there are other ways to fund your business. However, most are scarcely known and rarely used. Here are the most common forms of alternative finance.

First, invoice financing

With invoice financing, a firm will sell their trade debts to a third-party at an agreed rate. Usually, the bulk of the debt will be paid upfront with the remainder following when the customer pays up.

Invoice financing is best suited for larger firms that suffer from poor cashflow but who have efficient billing systems and reliable clients.

Second, asset finance

Asset financing works by using balance sheet assets to secure a loan. Asset financing is usually used when a business cannot secure a loan through traditional means.

Third, bank loans

Bank loans are one of the more straight forward alternative finance sources. You borrow a set amount from the bank for a set period of time at a fixed interest rate.

Carefully consider the risks of new business

This may sound counter-intuitive but new business is not always good business. Taking on new contracts, especially large ones, puts additional demands on your business so it’s important to determine whether or not your business can actually shoulder the new pressures.

Before taking on new contracts, audit your finances to work out whether you can afford to fund the additional working capital requirements.

Also consider the very real risk of your new client defaulting. If your new client doesn’t pay, could your business survive the losses? The survival of your business should never depend on the continued support of one single client.

Unfortunately, this is something I see very regularly.

A common example is small supplier who jump at huge supermarket contracts. While this seems like a great opportunity for the supplier, it’s actually very precarious.

If the supermarket pulls the plug, the company will struggle to cope with a huge chunk of its income disappearing.

Seek professional help

If your business is beginning to struggle, the time to seek help is right now. Not in several months when things have gotten even worse. The earlier you take advice, the more rescue options remain available so increasing the chances that all or parts of your business can be rescued.

If your company is struggling, don't wait for it to be too late. Get in touch with 180 Advisory Solutions today for free, confidential advice.

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