Cash flow is the lifeblood of a business. From the beating heart of your core operations, cash moves in and cash moves out.
Income – and from it, one would hope, profit – may be the raison d’etre of being in business. But no business makes money without also spending it, on wages, on stock, on premises, equipment, services, amenities, supplies and all the other costs necessary to keep a company running.
Sometimes a blockage of some sort occurs. Money due to be paid into the business gets held up somewhere and somehow. That can have a knock-on effect on the company’s ability to pay its bills. The definition of a business being unable to service its debts is insolvency.
Cash flow problems can range from the annoying (constantly having to chase down payments on invoices due, for example) to the terminal (e.g. creditors issuing a winding up order to seize the assets of an outfit that cannot pay its bills). To make sure your business doesn’t end up on the slippery slide to insolvency, action must be taken.
Here are five steps to follow to put cash flow issues right.
The first rule of tackling cash flow problems is to act decisively and early. The time to do something about it is as soon as you suspect there might even be a hint of a problem. Don’t leave anything to chance. If you wait to see if it develops into a ‘real’ problem – like not being able to pay bills – you’ll already be fighting an uphill battle to save your business.
Be on alert for repeated issues with receivables (i.e. invoices being paid late) or signs that your positive balance is shrinking and be proactive about finding a solution.
Contact your suppliers
One of the first things to do if you are worried about paying bills on time is to talk to your suppliers and other creditors. If you explain you are having a temporary issue, they will most likely be more than happy to agree to a deferment or an alteration in terms.
Burying your head in the sand and trying to pretend there isn’t a problem will only lead to issues escalating. Allowing bills to go unpaid without an open, honest explanation will erode trust and make people more predisposed to take enforcement action against you.
Chase outstanding invoices and renegotiate payment terms
Arguably the single biggest cause of cash flow problems for businesses is customers and clients not paying on time. Three in five small businesses in the UK are waiting on overdue invoices at any one time, costing the economy an estimated £61bn and leading to an estimated 50,000 firms going out of business.
The law states that invoices have to be paid within an agreed time period. If they are not, businesses have a right to take enforcement action, including adding interest to the amount owed, charging a fixed penalty, employing debt collectors and pursuing the debt through the courts.
However, an associated issue is the fact that many large firms insist on extended payment terms of up to 60, 90 or even 120 days. Suppliers are forced to wait three or four months for payment without it ever technically being late. And yet in the meantime, those suppliers have their own bills to pay.
It’s important never to accept payment terms that affect your ability to run your business. If you experience cash flow problems as a result of extended payment terms, ask to renegotiate or be prepared to walk away from the contract.
Look at options for cutting costs or increasing income
Of course, another reason why you might not seem to have enough cash coming into the business to cover your outgoings is that you’ve seen a dip in revenue or – something that is very much on the mind of all business owners right now – your costs have gone up.
Every healthy business wants to trade comfortably in the black, so feeling your cash flow being squeezed is a signal that you should review your expenses and take measures to reduce outgoings where possible. On the flipside of this, you should also look for opportunities to boost your revenue to offset any unavoidable rise in costs.
Seek professional advice
Finally, if you are concerned about your company’s finances, there is no shame in seeking professional advice. It’s better to get an accountant or recovery specialist onboard to help you through a temporary cash flow blip than it is to go straight to an insolvency specialist with the threat of creditor action looming over you.
At Xeinadin Group, we offer a range of services that can help your business steer a safe course through difficult waters. From accountancy services to small business audits, business advisory to corporate recovery, our expert team has the experience and knowledge to help you get back on a firm footing again.