Company cash flow, or the lack of it, is the most common cause of limited company failure in the UK. When the cash in the business becomes squeezed, it becomes difficult to pay your debts on time, order raw materials, pay staff, fund marketing campaigns and operate effectively.
Without additional funding or a customer payment to resolve the shortfall, the company can quickly become insolvent. At that point, you have a legal duty to act in the best interests of your creditors, which can lead to your company’s liquidation.
Clearly, this is something you need to keep a close eye on. Here are some steps you can take to resolve a persistent cash flow problem.
Cash flow is a measure of the money that flows into and out of your business. If you have positive cash flow, you have more money coming into the business than going out. That gives you enough working capital to replenish stock, fund growth and meet your day-to-day expenses.
If you have negative cash flow, more money is going out of the business than coming in. An unexpected expense could cause a temporary cash flow shortfall. However, when you have common cash flow issues or negative cash flow for a sustained period, you have a problem that you need to resolve.
There are many potential causes of cash flow problems, from poor sales and seasonality to insufficient credit control processes and ineffective management. Before you can consider measures to improve your cash flow position, you need to analyse your finances and get to the root cause of the problem
If you have a persistent cash flow problem, it could indicate that your company is insolvent, at which point, you have a legal duty to protect your creditors from further losses. If you believe your company is insolvent or you’re facing pressure or legal threats from your creditors, contact a licensed Insolvency Practitioner at your earliest opportunity. They will ensure you adhere to the insolvency rules and guide you through your options.
There are several steps you can take to improve company cash flow and get your business back on track.
Accelerate your receivables
Slow and late customer payments are one of the leading causes of cash flow issues. Payment terms of 60 or 90 days are common in some industries, and late payments are a big problem for many SMEs. However, you can make some relatively simple changes to encourage customers to pay you more quickly.
For example, if slow payments are a problem, you could ask customers to make a partial payment for products or services upfront. You could also offer a discount on the value of the invoice for payments made within seven or 14 days, although that will impact your profit margins.
If you’re affected by late payments, include a clear statement of interest charged on overdue accounts in your customer contracts, check in with customers a few days before the payment is due and escalate your collections activity swiftly if necessary.
Seek additional funding
Businesses often use loans, overdrafts and credit cards to bridge temporary cash flow gaps. However, they can be expensive or may not be an option if you have been refused this type of facility or have reached your credit limit.
Fortunately, there are other options. Invoice finance can be an effective way to boost your cash flow and support your business over the longer term. Rather than waiting 30, 60 or 90 days for a customer to make a payment, you can receive up to 90% of the value of an invoice within 48 hours of issuing it. Asset-based financing, which allows you to borrow money and use a company asset as security, is another funding method you could explore.
Negotiate with your creditors
You might feel like avoiding your creditors when you're short of cash, but if you’re behind on your debt repayments, contacting them to explain your position and asking for more time to pay is usually the best approach.
For example, if you have a tax bill you cannot pay, you could negotiate a Time to Pay Arrangement with HMRC. That will allow you to spread the repayment over a typical period of three to six months. You may also be able to renegotiate payment terms with finance providers and suppliers. Although these informal arrangements can boost your cash flow position, they’re not legally binding and interest and charges may still be added to the debt.
Sell non-essential assets
Selling assets that are underutilised or are not essential to your core operation can provide a cash flow injection. Although this approach can provide a quick fix, it won’t resolve the underlying issues, so you should also explore other ways to make lasting improvements to your cash flow position.
Enter a Company Voluntary Arrangement (CVA)
If your company has serious and persistent cash flow problems and multiple debts it cannot pay, a formal insolvency procedure called a Company Voluntary Arrangement (CVA) could be an option. It allows you to renegotiate your existing debts with your creditors and pay what you owe via monthly instalments over a period of up to five years. Some unaffordable debt may also be written off.
You must work with an Insolvency Practitioner to put the CVA in place. They will analyse your business to determine what you can afford to pay and draw up repayment proposals for your creditors. If your creditors vote to accept the proposals, the CVA will become legally binding and no more interest or charges will be added to your debt. You will then make a single monthly payment while you continue to trade.
Administration
Administration may seem like a heavy-handed approach to solving cash flow problems. However, if you have been threatened with legal action or a Winding Up Petition by a creditor like HMRC or a finance provider, it could be your best option.
Administration places a legal ringfence around the company, known as a moratorium, that protects the business while an Insolvency Practitioner formulates a recovery plan. They may decide to sell company assets or restructure the business so it can repay its debts and continue to trade.
At Begbies Traynor, we work with company directors across the UK to help them improve their cash flow position. As licensed Insolvency Practitioners, we can implement insolvency procedures such as a Company Voluntary Arrangement or Administration. However, most companies we work with turn a corner and continue trading without a formal procedure.
Contact our team for a free, same-day consultation to discuss your company cash flow issues. You can also arrange a meeting at one of our 100+ offices across the UK.
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