Don’t delay taking action to tackle cash flow pressures

This article was first published in South West Business Insider magazine.

The good news is inflation is now falling – but all too slowly, and it seems inevitable interest rates and other policies will pursue the aim of suppressing demand for some time to come.

A challenging economic environment makes it all the more vital for businesses to manage not just costs and profitability but also working capital cash flow.

Cash flow pressures can arise in many ways. Clearly, trading losses will eventually erode cash availability but there are other potential causes of pressure: many businesses are seasonal and require additional working capital to get through quiet periods. This can be particularly difficult where invoice financing is in place – when sales decline, cash can effectively dry up. Problems can also arise if a business is growing too rapidly.

If cash flow looks likely to be problematic, it’s best to address this as early as possible.

Planning is key

Every business should have a proper financial projection for the next 12 months – not just a standalone profit and loss (P&L) statement or cash flow spreadsheet but an integrated P&L, cash flow and balance sheet model. Only with such a model can you be confident everything ties together.

This projection will highlight in advance any pressure points, enabling management to address them before they become severe. Actions at this stage can include:

• Taking a hard look at costs to find savings
• Securing additional funding facilities – perhaps a temporary overdraft or short term trade/invoice financing
• Extending payment terms with creditors, either with or without their agreement. However, this strategy has risks – such as a key supplier refusing to deliver or credit rating issues which alert other creditors, who then press for payment.

Taking specialist professional advice is not only sensible but can also provide some protection against personal risks.

If pressures intensify

Most creditors will give a business some leeway to clear its debts. Even HMRC will enter into Time to Pay arrangements – especially if the business approaches them early and presents a credible repayment plan.

That said, creditor negotiations can take a lot of management time which might be spent more productively. There are also personal risks for directors of insolvent companies if they continue trading when they ought to have stopped.

In such circumstances, taking specialist professional advice is not only sensible but can also provide some protection against personal risks. PKF Francis Clark offers an options review service, which combines a review of the financial position and projections with an assessment of the pros and cons of the range of options available to the directors. With colleagues who specialise in obtaining funding, this avenue can also be explored.

Don’t delay!

If cash flow looks likely to be problematic, it’s best to address this as early as possible. I am often approached when the cash has run out and the payroll can’t be met, or a winding up petition has been issued.

By that stage options may be limited – had we been brought in earlier, we and the directors would have had more time to come up with creative solutions in the best interests of all stakeholders.

Find out more about how PKF Francis Clark’s Business Recovery experts can help you.