Cash flow problems can arise at any time, and any business owner must be aware of the risk. While short-term issues with cash flow can often be rectified quickly, longer-term problems can be much more difficult to resolve and recover from. If cash flow issues mean that your business cannot pay its debts when they are due, there can be serious legal and financial consequences, so it is very important to act quickly.
Here, the experts at Company Insolvency Advice provide some useful advice on how to recognise and diagnose the causes of cash flow problems, the general steps that businesses should consider to address these issues, and the bigger company rescue solutions that can provide a way out of difficult financial situations.
While it is vital to act as soon as you notice a problem emerging, there are many solutions that can enable your business to recover even when the situation develops. Whatever your situation, there are often ways to move forward that you may not have considered, and which could restore your business to solvency. If you need advice tailored to your specific circumstances, contact our expert team for free guidance on 0800 999 0666, or use the enquiry form to request a call back.
What are the biggest causes of cash flow shortfalls?
Ultimately, business cash flow problems are caused by more cash going out of the business than cash coming in. Some organisations have cash reserves to help them deal with the natural fluctuation of finance, but sometimes this is not enough to cover a business’ debts. Sometimes, it can be as simple as customers making late payments; other times, it can be something more serious, like permanently losing a big customer.
Often, small businesses or those that are still trying to gain a foothold in their industry will offer generous payment terms to customers and other debtors. This can attract customers and help the business to grow – but it can also create a problem if the business does not have a cash reserve to draw from when its own debts are due. Too many non-paying customers can create significant financial challenges in a short space of time.
In any of these cases, the business at the centre of the situation needs time. With some leeway, business owners can work to attract new customers, or offer existing debtors some wiggle room to make their payments, ensuring that their company returns to financial solvency. Many of the reasons for cash flow problems are internal: a lack of effective credit control procedures, payment chasing and collection strategies, and general oversight on business finances can all contribute to the problem.
However, if the business cannot pay its own debts, the situation can quickly develop. Creditors may be empowered to take legal action against your company if you are unable to pay, meaning that you need to react and resolve your immediate issues as soon as possible. This will also buy you the time you need to overhaul your credit control practices and improve your overall approach to cash flow, which will help to maintain a better balance between money in and money out, and buffer you against any future changes.
What can I do about a cash flow problem?
Once you have determined the cause of your organisation’s cash flow challenges, you can begin to resolve them.
Discounting or factoring invoices are two of the fastest ways to raise cash for your business. Effectively, these two methods are the same, but there are important differences that can affect how suitable they are in your business’ current circumstances. Both approaches involve selling your outstanding invoices to a third-party finance provider for a percentage of their value.
With invoice factoring, the finance provider will then chase and collect payment of the invoices on your behalf. Once the invoices are paid, the third party will pay you the outstanding balance, minus their fee. With invoice discounting, you remain responsible for chasing and collecting payment, which means that your customers or other debtors will not know that you are using invoice finance to improve cash flow.
Taking out a business loan can give you the cash injection you need to pay your debts when they are due, but you should ensure that your business can repay the loan according to the terms of your agreement.
There are several other ways to approach raising money, including private investment and crowdfunding. Ultimately, it is important to assess your business’ finances to determine whether this approach will be effective for you or not. We would not recommend this approach in all cases – speak to our experts to learn whether or not additional borrowing would be suitable for you.
How can I prevent future cash flow problems?
Along with these short-term strategies, there are several long-term approaches businesses should take to prevent problems from arising.
Reduce payment terms
By releasing extra cash into your business through invoice finance, you can buy yourself time to overhaul your approach to credit. Payment terms for debtors are often the first place to look, as these are among the biggest causes of cash flow issues for businesses. Many businesses offer generous payment terms to their customers, but do not receive the same terms from their creditors. This can create a cash flow shortfall, where a business must pay debts before it has received the money it is owed by customers.
Reducing payment deadlines is a fast way to ensure your business collects money sooner. You may not be able to do this for existing debts, which is why you may need invoice finance to support you in the short term, but if you implement this for any new contracts moving forwards, you can begin to plug the gap in your finances.
Strengthen credit control processes
There are several types of credit control where new strategies could restore or reinforce your business’ cash flow. It is worthwhile to explore the viability of all of these options for your business, as this could help to prevent future cash flow problems from arising.
You should begin by performing credit checks on all of your customers before offering them credit. This can help to ensure you only offer credit to customers who are likely to pay you on time. Another useful step is to set a maximum credit limit for customers. You may decide that this is negotiable for your best customers, or it may be better for your business to be completely inflexible, depending on your situation.
You can also trial this type of procedure to ensure that your business receives the greatest possible benefit, or speak to an expert for advice on how to best manage this type of debt in your organisation’s individual circumstances.
Ensure that you have appropriate procedures in place to chase and collect late payments. In some cases, implementing effective chasing procedures is enough to get creditors to pay. If they do not, there are also legal mechanisms you can use to recover payment.
Speak to an expert about whether or not you can (or should) make a formal demand for payment from your debtor, or escalate the matter and recover the debt through legal means. At Company Insolvency Advice, our experience with corporate debt advice means that we can support you in this endeavour.
These approaches may be effective, but there can also be downsides – they may be expensive or time-consuming, for example – so it is often best to resolve cash flow problems by negotiating wherever possible. The final outcome of legal action could be that your debtor is forced into liquidation and has to close down – in most cases you will receive a dividend, but this may not be the same value as your original debt. For these reasons, you should consider carefully whether or not to take this approach. On the other hand, if your business cannot pay its debts, you may face similar legal challenges from your creditors.
In such cases, you need to work with insolvency practitioners or other professional advisors to find the right company rescue solution. In many cases, businesses can still negotiate with their creditors to obtain more favourable payment terms – after all, creditors do not want to lose a customer that could go on to recover from its cash flow problems and thrive.