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Cash Flow Problems: How To Improve Cash Flow When Facing Insolvency

March 16, 2021 Hasib Howlader Cash Flow Problems: How To Improve Cash Flow When Facing Insolvency

Cash flow problems can cause serious issues for businesses if left unresolved, and can even lead to company failure.

In this article we’ll look at how to identify and solve cash flow problems so that your business can thrive.

What is a cash flow problem?

If you have a cash flow problem, it means the amount of money coming into your business is not enough to cover accounts payable.

Having cash flow problems is not necessarily the same thing as being insolvent, although the two are usually closely linked. Insolvency means a company is unable to pay its debts as they fall due, or does not have sufficient assets to cover them.

A cash flow problem may just be temporary and easily resolved, or in some cases it could be indicative of serious underlying issues. 

Either way, it’s best to address the problem as quickly as possible. If left unresolved cash flow problems can escalate, and in the worst case scenario could lead to formal insolvency proceedings and the closure of your business. 

What causes cash flow problems?

There are a number of factors that can cause when cash flow problems occur. Common cash flow problems include:

  • Failure to send invoices and collect payments promptly
  • Seasonal fluctuations in the market
  • Low profit margins
  • Holding too much stock
  • High overheads 
  • Over-reliance on a small customer base
  • Accelerated growth putting pressure on short term finance 
  • Funding sources that don’t meet the company’s changing needs
  • Undisciplined spending
  • Inadequate credit control and credit check procedures
  • Bad debts
  • Poor financial planning
  • Poor cash flow management

It’s important to remember that even profitable businesses can have cash flow problems. 

Business cash flow problems are a particular concern for companies that rely on a very small number of customers or contracts - sometimes, one late payment could be all it needs to push them into insolvency.

How can I identify them? 

Accurate cash flow statements are a vital tool for any business, as these will enable you to identify whether your company has a cash flow problem.

A cash flow statement is a document that records the cash that has come into and gone out of your business over the past month, quarter or year.

A positive cash flow means that more money is coming in than going out. In contrast, a negative cash flow shows that more money is going out than coming in.

You should review your cash flow statements regularly to ensure you have an accurate picture of your company’s position.

Other key indicators of cash flow problems could be a noticeable slow-down in sales, outstanding invoices piling up or a run of higher-than-usual expenses.

What’s the best way to prevent them?

Prevention is better than cure, as the old adage goes, and the best way to solve cash flow problems is to avoid them in the first place.

This is where cash flow forecasts come in. Net cash flow forecasts project your cash inflow and how much will also exit your business in the coming months.

Cash flow forecasts show both projected figures and the actual amounts. It’s important to keep them updated when you know the actual figures (for both cash inflows and cash outflows) so that you can improve their accuracy over time.

Up-to-date cash flow forecasts will give you a clearer idea of how much cash your company will need in the near future. This will help you predict any future cash flow problems or shortfalls and plan accordingly - for example, by organising a line of credit in advance.

How can I solve cash flow problems?

There are a number of different ways to deal with company cash flow problems, including:

  • Invoicing accurately and promptly

Whether or not customers pay bills on time is largely out of your control. However, making sure you invoice promptly and accurately can make the process more efficient and reduce the risk of late or non-payment.

  • Securing a flexible line of credit

Overdraft facilities, short-term business loans, invoice factoring and company credit cards can all provide quick and flexible access to cash. It’s important to find a source of finance that suits your business and has affordable interest rates.

  • Negotiating favourable credit terms with suppliers

If you have a solid payment history with your suppliers, they may be open to extending your payment terms. This would enable you to keep hold of cash for longer and reduce the risk of cash flow shortfalls.

  • Freeing up assets

If your company is asset-rich, you may be able to sell off non-essential assets as an easy way to increase working capital and secure some cash reserves. But if you’d prefer not to sell your assets, you may be able to lease some of them out to bring in extra income.

  • Auditing your company’s finances

If your company is experiencing prolonged or recurring cash flow issues, give your finances a thorough audit. Working with your accountant, review your company’s income and outgoings carefully to see where your business can make improvements or savings.

  • Talking to an insolvency specialist

Cash flow problems are often an indicator that a company is insolvent, or on the brink of insolvency. If this is the case it’s advisable to seek immediate professional guidance before things escalate.

An insolvency specialist can work with you to assess your company’s financial position and determine the best course of action.

At Hudson Weir, we have many years of experience helping struggling companies solve their cash flow problems. Get in touch with us today for a free, no obligation consultation.

ACCAThe Association of International AccountantsICAEW Authorised Training EmployerICAEW Licensed Insolvency Practitioners (UK)Insolvency Practitioners AssociationR3

Hudson Weir are an established firm of Insolvency Practitioners who specialise in business recovery and corporate financial solutions.

Hudson Weir provides industry leading, nationwide services for its clients with the intention of easing financial pressures and providing recovery strategies for struggling businesses.

Hudson Weir Ltd (Company number 09477593) is a company registered in England and Wales.

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