All too often I see businesses struggling with cash flow that rely on one of the above happening.
For the long-term health of your business, adopting a better cash flow management strategy is essential.
So what should you do? Here are five ways you can better manage cash flow in business:
Sound cash flow management starts with an honest cash flow forecast on a week by week basis for the next two months, and then monthly thereafter. This may put your mind at rest that there is sufficient cash coming in. On the other hand, if it’s not positive it will at least show you how much is needed to maintain the business. Although much has been said about the banks’ reluctance to lend, the reality is that banks do want to lend but need a proper ‘pack’ of financial information and a forecast before they can evaluate a business properly. If you cannot show them you have a solid understand of how to manage cash flow in business, do not expect any new funds to be heading your way.
If cash flow does extend beyond your existing facility then don’t despair. Look at your expenditure and see if you can defer some of your commitments over a period of time. Please, don’t just phone everyone up and ask for an extra 60 days credit but take time to flex your cash flow so that creditors can be paid over an extended period. If, no matter what you do, it looks like you are going to run out in, say, two or three months then don’t hide away and hope for the new client/white knight. Instead, go and see a professional, be it your accountant, lawyer or turnaround professional who knows how to manage cash flow even in the most challenging of circumstances. You’ll be surprised what can be done.
Creditors are generally happy to accept an offer to pay over an extended period but you must be very careful not to get this agreement and think you’re out of the woods. In my experience you can renegotiate your debts once, but if you try to do it for a second or third time creditors’ patience runs out. They will quickly become wise to the fact that you either do not understand how to manage cash flow or you lack the discipline to do so. Please ensure that your forecasts are robust and that the proposed deal is viable.
All too often I have seen directors lose their focus on a business due to creditor pressures resulting in frustration and depression. This can be a disaster for a business which really needs the owner to concentrate on how to turn it around, maintain staff morale and focus on the future. If that’s not possible then take advice on cash flow management strategies going forward and spread the burden.
I have seen scenarios where directors haven’t drawn a salary for one or even two years whilst they have been juggling with their creditors. Unless you are one of the Richard Bransons of this world, one of the main reasons to set up a company is to make a living and in an ideal world to sell the company and retire. Given all the pressures that business owners are under they deserve to be paid, but if the business in its current form cannot support this then the owner must seriously consider other possibilities. These might be employment elsewhere (without the pressures of dealing with creditors/staff/customers) or some form of restructuring of the business. Of course the best way to avoid this is to have a clear strategy on how to manage cash flow from the outset.
Every business has its own challenges but if you do lie awake worrying about cash flow then please take advice and take it as early as possible. Develop some sound cash flow management strategies both for your health, and for that of the business.
David Birne, Business Recovery and Insolvency Partner
T 020 7380 4908