Cash flow – a matter of life and death?

To paraphrase the late, great Bill Shankly it is much, much more important than that.

Most businesses will have an issue with cash flow at some stage in their life and for an SME this can be catastrophic; according to Dun and Bradstreet, 90% of small business failures are caused by poor cash flow.

So what kind of issues can give rise to a cash flow problem? Imagine the situation at 9.00 on a Monday morning when you get the bad news. It could be:

• A major debtor suddenly decides they can’t or won’t pay
• The expected increase in your overdraft limit has just been turned down
• The new IT system is not working as expected and needs further, urgent investment

So what can you do about it?

 Remember your ABC(D)..

AA – Alternative Avenues (of finance). The market for funding products has changed significantly in recent years with alternatives to the main clearers providing more choice and competition. As well as challenger banks such as Metro and Aldermore, there are crowdfunding/peer to peer organisations (e.g. crowdcube.com, fundingcircle.com), alternative finance brokers (e.g. capitalise.com, fusethree.co.uk) and alternative invoice financing companies (e.g. fundinginvoice.com, marketinvoice.com). The common themes here are speed and flexibility which can very important in a cash crunch situation, but usually with a higher cost reflecting the greater risk to the lender.

BB- Business Basics. We know that cash is not the same as profit, but in the short term actions taken to improve profit will usually have a positive effect on cash. Have you reviewed whether higher pricing can be justified on certain products or services? They may be worth more to your customers than you think. Also giving notice of higher pricing may encourage customers to buy early, giving a short term boost to cash flow. In any business there are areas of discretionary spend and ineffective spend which can be deferred or eliminated ; every business should be reviewing where it cuts costs (but not investment) and short-term cash-flow issues can help the business take the tougher decisions it should have been taking anyway.

CC – Creditor Communication. Ultimately it is an organisation’s inability to pay its bills that will be its downfall so early communication about cash-flow issues with creditors is critical. Agreeing (temporary) extended payment terms with long established major creditors can make all the difference – and this can include HMRC. And keeping this communication going as the business recovers its cash position is also important as the path to recovery is rarely smooth.

DD – Debtor Dialogue. Good credit control practices are vital in maintaining a healthy cash flow. Are yours up to scratch? This starts with focussing on the larger overdue debts (and Pareto rules tend to apply here; 80% of the debt is usually with 20% of the debtors), includes early follow up and escalation of other overdue debt and also prompt invoice query resolution to avoid excuses for late payment.

All the above steps should be taken – and simultaneously – to get the business back in shape. Recovering from a cash flow issue is not quite ‘as easy as ABC’ but with focus, pace and insight the prognosis is good. 

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Stephen is a member of FD4, which is a network of experienced commercial Finance Directors that are passionate about adding value to Companies. They are engaged Part Time (on an hourly or daily basis) to do the work of a full time Finance Director, but at a fraction of the cost. They specialise in Exit Planning; Cash Generation and Performance Improvement, see more at www.fd4.co.uk