The old business cliché that ‘Cash is King’ has a dark flip side for businesses. A lack of cash can mark the trigger point for a business’s decline. When cash flow is poor, bills may not be paid on time, meeting payroll becomes an issue, suppliers may query the delivery of goods and services or even cease taking orders through the lack of timely payment, and the threat of HMRC enforcement action looms large.

At the cash flow crux is the issue of insolvency. If a company cannot pay its debts when they fall due, it is at risk of failing one of the legal tests for insolvency. From this point (and possibly earlier), the Directors have a duty to switch from focussing on earning profits for the owners to putting the interests of the creditors first.

The good news is that prompt and decisive action can improve cash flow and avoid closure and Liquidation.

What causes cash flow problems?

There are many reasons why cash flow becomes an issue. It could be a dip in sales, poor credit control allowing customers to delay payments, or a large bad debt. It might also be an unexpected major expense or suppliers tightening their credit terms to ask for quicker payment.

It might just be seasonality, such as with businesses having to stock up ahead of a peak Christmas trading season or low occupancy in a hotel during the quiet winter months.

Worst of all is when the underlying cause is persistent losses, which always turn into negative cash flow eventually.

The important thing is to find out what’s prompting the cash crisis, realistically assess how bad it might get, and decide whether it is only temporary. Based on these key facts, the solutions will vary.

What are the options to improve cash flow?

Improve cash collection

Late payment by customers is endemic in the UK. You can find more about it in our detailed review of this serious problem here.

Getting a grip on collecting the debts owed to a business involves several strategies, including:

• Know your customers and keep due diligence on their finances up to date.
• Be clear about payment terms.
• Avoid accepting cheques as payment.
• Invest in credit control.
• Don’t delay in chasing a late payment – start the first day the debt is overdue.
• Claim interest on overdue amounts and make this policy clear from the outset.
• Be flexible over large amounts owed when necessary.
• Consider offering a discount for earlier payment.

Discuss payment delays with suppliers and other creditors

Avoiding talking to creditors when cash is tight is understandable, but rarely the right approach. It’s far better to speak with them before they accelerate their collection processes, to explain the cash difficulties and ask for more time to settle the amounts due.

Debts owing to HMRC for PAYE, VAT, and other taxes are often a particular pressure point. It may be possible to agree to a Time to Pay deal with them, but only if you start the negotiations before the arrears get too serious.

Sell non-core assets

Some businesses have assets that are not essential to their ongoing operations, such as surplus equipment or vehicles. Turning these into cash can help ease financial pressures, although this is more of a short-term fix and won’t address the underlying issues.

Raise extra financial resources

An obvious option is to ask your existing lender for a loan or an increased overdraft facility, but this sort of emergency funding can be expensive and may be difficult to obtain if the business has serious underlying financial problems.

An alternative could be to look at asset-based lending solutions. You could get receivables finance linked to the invoices you raise to your customers. These arrangements mean that rather than having to wait 30, 60 or 90 days for a customer to make a payment, you will receive up to 80% or more of the value of an invoice within a couple of days of issuing it and only have to wait for the balance when the customer pays.

Another route is to borrow against the value of existing assets, such as property, machinery, or vehicles, assuming they are not already subject to some form of finance, such as a mortgage or a lease.

Company Voluntary Arrangement (CVA)

Where the problems causing the cash flow crisis are fundamental, and the cash flow improvement actions still won’t generate sufficient resources to pay the outstanding debts, the answer may be a formal insolvency procedure called a Company Voluntary Arrangement (CVA). This process allows you to renegotiate the existing debts with creditors and pay what is owed by instalments over a period of time, perhaps as long as five years. In many CVAs, the creditors agree to write off a percentage of what they are owed.

A CVA can also be the answer where the cash flow problem is serious but purely temporary, such as when the sale of assets to raise funds has been delayed, or a major contract payment will be postponed for an extended period.

Under insolvency legislation, a licensed Insolvency Practitioner (IP) must be used to put a CVA in place. They will analyse the business to work out what it can afford to pay and put together repayment proposals for the creditors. If creditors vote to accept the plan, the CVA becomes legally binding. No further interest or fees can be added to the debts, and no enforcement action can be taken against the company.  A CVA can be extremely flexible to adapt to the circumstances of each business.

Administration

Administration might seem like a drastic solution to cash flow problems. However, if a company is threatened with legal action or a Winding Up Petition by a creditor such as HMRC or a lender, it could be the best and possibly the only option.

Administration ringfences the company and protects its assets and business against creditor enforcement action, while an Insolvency Practitioner formulates a rescue plan. As with a CVA, an Administration can only be implemented by a licensed IP. The procedure may involve selling some or all of the assets, or the solution may be restructuring the business so that it can repay its debts and continue to trade.

Advice on cash flow issues

If you need help improving cash flow or dealing with a cash crisis, we provide an initial free consultation to review the situation and recommend the best course of action. If we think a CVA or Administration is the best solution, our specialists can support the business throughout the process.

If you are seeking professional advice for your business, Opus is here to help. You can arrange a no-obligation and confidential call with one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.