How to take control of your cash flow
Some businesses, including cafes and shops, deal in cash; customers pay at the point of purchase. Others raise invoices after providing goods and services.
If customers pay you faster than you pay creditors, you could have a positive cash flow. If you pay creditors faster than customers pay you, you could have a negative cash flow, which may mean that you require more working capital within the business. It’s also worth remembering that if you have a negative cash flow, cash flow issues could get worse whilst your turnover is increasing! There are situations where a company is growing, but low margins mean that funding requirements are higher and the business cannot finance the growth organically. Maybe a good problem to have? – Only if you are able to manage the cash flow or have access to sufficient finance.
Overall, controlling cash flow is crucial for business survival, especially in the current economic climate.
What happens if you don’t keep on top of your cash flow?
One of the things many people struggle to understand is how a business that is profitable can go bust. The answer is simple: cash flow. One of the statutory definitions of insolvency is being unable to pay your debts as and when they fall due.
There are three main factors to take into account when it comes to cash flow:
If these are in balance, then the cash flow will cause no issues. In a positive scenario, your business can have a cash surplus. If there is a shortfall however, it could mean trouble for your company and in most circumstances, the third factor is the one that most companies look too. With money available, there will be a further lag with a business that is cashflow negative, which could actually make matters worse, whilst most companies don’t want to say to their suppliers or HMRC that they want to delay payment.
Bear in mind, however, that if a business is struggling to meet its commitments, new lines of credit are unlikely to be open to it, so planning ahead and identifying any cashflow issues is likely to maximise the chances of accessing the required finance
Useful tips for managing cash flow
We can help
Poor cash flow is an important factor for most business failures. Here at Parker Andrews our experts understand the day-to-day demands of business and the risks of liquidation and insolvency; if you have any concerns or issues regarding managing your cash flow effectively, contact us for free, confidential advice.
Rishi Karia, Licensed Insolvency Practitioner, comments:
“They say cash is king and for any business to survive it is. As well as anticipated payments, most business owners will know that companies can be faced with unexpected costs for a variety of reasons.
“There are companies out there who are breaking even or even making losses but continue to trade due to positive cash flow and don’t realise until accounts are prepared that they made a loss. This can catch up with them.
“Other companies making profits have time delays in receiving payment, which directors initially expect and anticipate, but when they get busier and their working capital requirements increase as a result, the directors/shareholders start scratching their heads wondering why there is no money for them to draw and what happened to the CT money that they should have put away and is due in a few months time.
“As such, preparing a cash flow forecast and reviewing and updating it regularly is important. Most companies want to grow and expand, so that they can take advantage of some economies of scale and make more money, but when the directors look to drive that growth aggressively and quickly, the company’s finance team or accountants need to ensure that they don’t hit a brick wall, with as much force as the aggressive growth.”
Need Further Guidance?
If you’re facing company liquidation and need expert advice, contact Parker Andrews for a consultation. Our team can guide you through every step, ensuring you fulfil your responsibilities while protecting your interests.
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