Company Cash flow Problems

Company cash flow problems experienced by trading businesses are one of the signals that business failure could be on the horizon. Paying close attention to this could be how to avoid company Liquidation.

What Is A Company Cash flow Problem?

Cash Is King

Without oxygen you cannot breathe, no matter how brainy (profit) one happens to be and no matter how strong your heart (turnover) is to pump the blood. Cash is the life of any trading business and without it, the business dies.

cash is king

Being profitable *is* fundamental and the expression “profit is sanity and turnover is vanity” does hold true. But Cash is still KING.

To pay bills, such as wages and suppliers to ensure business continuity, it is essential that a business keeps tight rein and control over the money coming in and going out of the business.

It is not at all uncommon for businesses to experience cash flow problems, but it can be an early warning sign that insolvency and business failure could be on the way.

Causes Of Company Cash flow Problems

The causes of cash flow problems can be many and varied, but they can include:

  • late payment by customers
  • holding excessive amounts of stock
  • low or very tight profit margins
  • seasonal variations in business trading
  • having few customers with over reliance on one or two large clients
  • a lack of restraint over company expenditure
  • bad debts incurred with customers owing money going into liquidation or insolvency
  • poor credit control and financial management
  • obtaining expensive terms of credit that is unsuitable for the needs of the business
  • very high overheads that the Company cannot afford
  • an undisciplined approach to business management and naivety
  • deterioration in trading due to factors outside the Company’s control
  • overtrading the business due to rapid growth

How To Prevent And Solve Company Cash flow Problems

Cutting Costs

Cutting costs is the easiest way to address cash flow problems to avoid going into company Liquidation.  However, it needs to be undertaken with care so that costs are not cut to the bone and strangles the productivity of the business.

Implementing cost cutting selectively is therefore essential and needs to be planned carefully if it is one of the strategies used to address a company’s cash flow problems.

An example of how one might address cash flow problems might be to simply move into cheaper premises, particularly if luxurious offices are currently being used that are causing a cash flow drain on the company.

However, this will depend on the type of business and sector of the economy, particularly if a loss of prestige would damage the business.  For example, if the business was a retail operation selling high value items, it may suffer a significant loss of business if it moved away from trading premises at a key location that attracted such customers essential for its sales.

Sales Lines

To address a company’s cash flow problems, a company may be able to introduce new product lines or services to boost its turnover. However, this needs to be carefully considered alongside the additional cost that it may incur.

If, however, such additional product and service lines can be incorporated within the existing business structure, and without rapidly incurring costs to develop and market them, then this could be a viable way of improving a company’s cash flow.

Increased Sales Prices

A company with a core customer base and a loyal one may be able to improve its cash flow position by simply raising prices within reasonable limits.

Clearly, there will be a limit to what customers would be willing to pay (including loyal ones) before they start looking elsewhere at competitors. However, with a core and loyal customer base, this could reduce the cash flow problems of the business and may be a viable way forward.

Renegotiation Of Terms Of Trade With Suppliers

One of the biggest drains on a company’s cash flow when a business is struggling will be the payments that it needs to routinely make to its suppliers to ensure continuity of its trade.

Common terms of trade applicable to suppliers will be payment within 30 days of receipt of the supplier’s invoice shortly following receipt of the goods or services being provided.

If a business has trade suppliers that it has a longstanding history with, it may be possible to approach them to extend the terms of credit that they are willing to afford the business. For example, from 30 to anything up to 60 days.  Although what is being done is to stretch your payment terms of trade with the supplier, provided it is done with consent then there is nothing wrong with that. It may be incredibly useful as a mechanism to address the cash flow problems of a business.

If you have good terms and relations with your suppliers and the situation is transparently explained to them, they may be willing to accept such new terms for a period of time, rather than lose you as a customer or a client. This can be one of the most important and useful ways to reduce the risk of company Liquidation due to cash flow problems.

Improvements To Credit Control Systems

Improvements to credit control systems can greatly improve the fortunes of a business suffering cash flow problems.

Late Payments

Late payments by customers resulting in deterioration of a company’s cash flow position, and even bad debts, can be a central cause as well as a solution upon recognition of the same to dealing with the problem.

Diligence in pursuing late payments to free up cash that otherwise would be tied up in the sales ledger will improve cash flow. The Late Payment of Commercial Debts legislation entitles businesses to charge interest when customers pay late outside of contractual terms.  Reminding customers of this position can encourage timely payment.

Over Reliance On A Customer

If a business is overly reliant upon one customer, or a handful of customers, then a significant bad debt can tip a business into insolvency.  It is therefore hugely important to monitor the creditworthiness of both existing customers and prospective new customers.

A business that is over reliant on one or a handful of customers would be well advised to contact a relevant credit reference agency, such as Experian and/or Equifax, and obtain credit reports to assess the ability of its existing customers to pay and maintain existing relations.

New Customers

Taking care before providing credit of a substantial or material nature to any new customers will go a long way to safeguarding against cash flow problems.

Implementation Of Timely Procedures

Organisation of the Company’s sales ledger function through good credit control practices can materially address a company’s cash flow problems.  For example, it is important to ensure that sales invoices are issued to customers as soon as supplies have been made when a business is entitled to charge for such services.

Asset Financing To Solve Company Cash Flow Problems

If, when you look upon your balance sheet, it looks healthy in terms of the net asset position and yet the business has cash flow problems, then it is conceivably possible you are what is known as asset rich but cash poor.

In the event that too much of the business’s capital is tied up in assets, then one way to free up cash may be to look at asset-based financing to improve the company’s working capital position.

This does not mean that it will be necessary to rush out and dispose of business assets. Indeed it may be impractical to do that in the event such assets are required for the purposes of the trading activities of the business.  However, there are other options available.

Leasing

Asset based financing, such as leasing, may enable a company to refinance the assets and keep them, but provide an immediate injection of cash.  This needs to be balanced against the future cash flow forecasts because of the repayment terms of such leasing agreements.

For example, if a business has a fleet of cars then it may be possible to sell those cars to free up cash and enter into leasing agreements to rent the cars from a leasing company.

Options Available When Company Cash flow Problems Cannot Be Solved

There are options available to a company with cash flow problems business when cash flow problems are too serious to be solved by any quick fixes such as the cutting costs or refinancing referred to above. However, even if a cash flow problem cannot be solved it can still be possible for a company to avoid going into Liquidation.

Time To Pay Arrangements

Time To Pay Arrangements do not just apply to supplier creditors; they also apply to the HMRC. As HMRC is very often a major creditor entering into a Time To Pay Arrangement can be key to avoiding going into company Liquidation.

If a company is struggling with cash flow problems and unable to pay its Corporation Tax or its PAYE liabilities when they fall due, then it may be able to apply to HMRC for what is known as Time To Pay Arrangement.  In the first instance, this can involve an informal arrangement discussed with the relevant tax office.  However, if your problems are more serious and you are already in breach of such an informal arrangement, it is still possible to approach HMRC to enter into a formal Time To Pay Arrangement.

Company Voluntary Arrangement To Avoid Liquidation

A Company Voluntary Arrangement (“CVA”) is in effect a statutory contract with your creditors.  It is a formal insolvency procedure that can be used to repay creditors, but over a period of time.  Subject to the agreement with your creditors, it may be possible to negotiate through a CVA a significant discount of the terms of repayment of company debts, both in terms of amount and timescale.

This is down to the agreement of creditors as a Company Voluntary Arrangement requires 75% or more of creditors to agree to the same.

A key difference between a CVA and Time To Pay Arrangements is the potential ability for agreement for the debt to be reduced. As such a CVA can be a very effective way to avoid going into company Liquidation.

Pre-Pack Administration To Avoid Liquidation

If a company’s cash flow problems are so severe that creditors have commenced taking legal action against the business, such as having it wound up and placed into Compulsory Liquidation, then a Pre-Pack Administration may be an option available to alleviate such a cash flow crisis.

One of the key tools available from the Administration procedure is the Moratorium that puts a freeze on creditors to give a company a breathing space to develop a strategy with a Licensed Insolvency Practitioner to take the business forward and help make a fresh start.

Closing A Company With Cash Flow Problems

In the event that a company has severe cash flow problems that cannot be resolved by Administration and it cannot continue to trade, then at Oliver Elliot, we will be in a position to help you close down the business. As our CEO, Elliot Green, is a Licensed Insolvency Practitioner, he will be able to explore all of your insolvency options so that your struggles can be properly addressed. We are fully licensed to enable you to consider placing the company into Creditors Voluntary Liquidation if it is right for the circumstances. This may enable you to make a fresh start. Contact us for a quote and free initial confidential advice.

What Next?

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If you have any questions in relation to Company Cash Flow Problems then contact us as soon as possible for advice. Oliver Elliot offers a fresh approach to insolvency and the liquidation of a company by offering specialist advice and services across a wide range of insolvency procedures.

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Disclaimer: Company Cash Flow Problems

This page Company Cash Flow Problems is not legal advice and should not be relied upon as such. This article Company Cash Flow Problems is provided for information purposes only. You can contact us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.: C

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