Improving cash flow in times of financial difficulty

Steps that can be taken to provide short term relief during times of cash pressure.

All businesses go through cycles of prosperity and periods of trading difficulty. The information below suggests options to improve cash flow when trading becomes difficult.

Examples of cash flow difficulty include:

  • Regularly breaching agreed current account facilities
  • Missed loan payments
  • Late payment to your creditors
  • Missed tax payments
  • Difficulty paying the wages

A useful starting point is to look through your last set of annual accounts (especially the balance sheet) and identify areas which have required more cash this year than last year. For example, if your stock levels increased, this will have tied up more cash, i.e. the money you spent to buy stock has yet to be recovered by selling it!

Please refer to your accountant, our business management team on 0345 072 5555 or your Relationship Manager if you need any assistance in understanding your accounts. We are available from 8am to 8pm Monday to Friday and 9am to 2pm on Saturday.

Working Capital

Below are methods to improve working capital within your business.

Working capital represents the funds used in the day to day operations of the business. Every business will require funds to purchase goods/ services and these will often be held as stock until sold. Upon sale, you may offer a period of credit before the end customer pays.

This process results in a funding need – the “working capital requirement” of the business.

Trade Debtors are the people or businesses which owe you money for goods or services you have provided. If the focus is on improving your cash position, then the following options may help.

Chase outstanding debts

Are there debtors that have been outstanding for a long time? If you focused your efforts in this area, could you bring some of this money in?

Don’t just chase debts when they fall due, why not call early and remind the customer that payment will soon be due?

Settle disputed claims

Where you have debtors outstanding for a long time due to outstanding disputes, it may be worth settling the claim to bring the money in, even if the agreement is for an amount less than you would ordinarily have accepted.

Offer discounts

Could you offer a discount for early payment? For example, a 5% discount for payment within the next week could prompt debtors to pay early.

Renegotiate terms

For new contracts or customers, are you able to offer reduced payment terms which will help to improve your working capital position without losing the relationship?

Trade Creditors are the people or businesses which you owe money for goods or services provided to you. If the focus is on improving your cash position, then the following options may help.

Use the full amount of credit offered

Don’t make payments sooner than you are contractually obliged to.

Renegotiate longer terms

Can you approach your supplier and request a longer payment term?

Offer staged payments

If there is a large payment outstanding, can you make staged payments over a number of months

"Set aside” disputed debts but keep current payments up to date

If there is a disputed amount, then discuss with your supplier whether setting aside the disputed amount and continuing to trade as normal would be possible. Keep new invoices up to date and agree settlement of the disputed balance separately.

Other creditors

Can you negotiate payment plans with your Other Creditors, e.g. HMRC

Stock includes the raw materials and finished goods you hold prior to being sold. If you can reduce the amount of stock you are holding then you could free up additional cash.

Rent

Can you negotiate a reduced rent or rent free period on your premises? It may be in the landlords interest to agree to this rather than have the premises lie empty.

Utilities/Insurance

Can you look to improve the terms you have on your utilities and insurance?

Overheads review

Review all of your fixed overheads and assess which areas can be reduced or renegotiated.

Wages

Take a rational approach to staffing to reflect the current level of trade of the business.

Can you reduce the working week for the workforce? If you rely on expensive agent workers, could these be cut back?

Consider placing a temporary stop on hiring until the trading position improves.

Overheads represent the costs you incur each month whether your business sells any product or not. It is especially important to review these costs if your turnover has dropped and is likely to remain lower for a significant period.

Rent

Can you negotiate a reduced rent or rent free period on your premises? It may be in the landlords interest to agree to this rather than have the premises lie empty.

Utilities/Insurance

Can you look to improve the terms you have on your utilities and insurance?

Overheads review

Review all of your fixed overheads and assess which areas can be reduced or renegotiated.

Wages

Take a rational approach to staffing to reflect the current level of trade of the business.

Can you reduce the working week for the workforce? If you rely on expensive agent workers, could these be cut back?

Consider placing a temporary stop on hiring until the trading position improves.

Fixed assets tend to be longer term assets held within the business to help generate income over the long term. This may include; land, buildings, machinery, cars and fixture and fittings.

Delay non-essential expenditure

To improve cash flow, you may consider reviewing planned capital expenditure. This could be the purchase of new fixed assets or improvements to existing fixed assets.

Non-essential expenditure could be delayed.

If deemed essential, are there more cost effective options? (explore finance options to reduce your monthly costs)

Review asset usage

Assets which were once vital to the business may no longer be used to the same degree.

Review which assets are used fully and identify assets which could be sold to quickly raise cash.

Assets for sale

Does the business have land or property that could be sold to raise additional funds?

If you have assets for sale, are they being actively marketed to generate interest?

Senior management to take control of cash

Prior authorisation of expenditure by senior management could be introduced to encourage employees to consider which payments are essential. Senior management will have the visibility to challenge and change the approach to payments.

Product offering

Can you focus on quicker paying work/products even if it is at a slightly lower profit margin to improve short term cash flow?

Partial business sale

Can part of the business be split off and sold? This may bring in cash and free the owner to focus on the remaining business area.

Director drawings

Are the directors able to reduce their drawing requirements from the business until the cash flow position improves?

Manufacturing process

Are you able to reduce costly errors and reworks from the manufacturing process?

Shareholder support

Are the shareholders of the business able to inject any funds to improve the current position?