Cash flow is the lifeblood of any business.
Businesses don’t fail because they don’t make profits, they fail because they run out of cash. So when a business receives a sudden shock, like the Government telling them they must close for an undetermined period of time, looking after cash flow is vital. If your business has been instructed to close its doors because of the Coronavirus then you need to take immediate action. Taking steps to limit the cash flowing out of your business is what businesses usually do when they are about to go into an insolvency situation. Therefore looking at what payments the business must make to survive, like insurance, is the first step to take. This will give you the space to focus on a survival plan for the business and time to explore what support you might be able to access through the various Government initiatives.
What steps should you be taking to monitor and improve cash flow
We understand that cashflow will inevitably be an issue for businesses in the coming weeks. The impact of less cash coming in from customers mixed with payments that need to be made and commitments to employees will more than likely lead to a quick deterioration in cash balances.
One of the first steps that we would recommend is forecasting cashflows for the next four or five months. This doesn’t need to be done with expensive software or apps but can be plotted on a piece of paper or in excel, but it does need to carefully identify on a monthly basis the cash you expect to receive and pay out. This cash flow forecast should also include estimates for various tax payments, Corporation Tax, VAT and PAYE. These can be based on your last payments as a guide.
When asked how to forecast cash receipts. As you want a guide to the receipts you might get, look back through bank statements or your book keeping records to see what daily, weekly or monthly averages you have been achieving and use these.
Once you have established the baseline cash position you should then look at flexing the cash receipts to allow for a slow down in money coming into the business. This will hopefully then give you an idea of where your cash position will be if things deteriorate and people stop paying their bills.
Armed with this information you will then be able to make some decisions about what mitigating actions you might be able to take. You can also flex it for inflows of cash from various Government schemes designed to support business.
It is important that you plan your cashflow carefully and where shortfalls are predicted plan to fill the gaps with mitigating actions you can take and also using the support schemes that are available.
Some practical steps aimed at helping you manage working capital…
In these difficult times, the following points are intended to help maintain a fluid movement of cash into your business:
- Issue invoices more regularly and consider invoicing upfront or sending interim bills.
- Look at offering discounts, for example 5% if payment is made within 7 days to bring forward receipt of the money.
- If taking on any new customers ensure you use a credit check report for example, Experian.
- Debt Collection
- If you use a cloud-based accounting package, look at the possibility of automating your debt collection system, for example Chaser.
- If you have debts beyond your payment terms look at placing the invoice with a debt collection company.
- Look at financing your debtors using invoice discounting.
- If you have individual large sum invoices look at single invoice finance.
- If customers are struggling to pay be flexible and allow a payment plan by way of monthly direct debit.
- Look at your various stock lines and operate a just in/just out system.
- Payment to Creditors
- Contact your suppliers to discuss extending terms or agreeing a payment plan.
- If offered an early payment discount by individual suppliers, look at settling their invoices first.
- Capital Expenditure
- If considering purchasing capital equipment, investigate leasing the equipment rather than purchasing.
- Purchase any new equipment via a hire purchase agreement.
- Extend the term of the hire purchase agreement to reduce the monthly
- Transfer any excess cash into a deposit account.
- Look at other investment opportunities whereby you still have quick access to the funds if required.