Company Cash Flow

Cash Flow Problems

Solutions to Save Your Company

Even the most successful companies can be affected by cash flow problems. From client non-payment to unforeseen expenses, a wide variety of factors can put your company in a difficult financial position due to slow or disrupted cash flow.

Company cash flow problems emerge when the amount of money your company is spending, whether on employee salaries, payments to suppliers or debt repayment, exceeds the amount of money coming in.

Cash flow problems are often relatively sudden and unexpected, caused by the loss of an important account or revenue source. Sometimes, they’re the result of bad financial forecasting or an overly risky business model.

In this guide, we’ll address some of the causes of company cash flow problems. We’ll also look at solutions available to your business to improve its immediate situation, allow it to manage its payments and improve its long-term cash flow.

Why do cash flow difficulties occur?

Even profitable businesses can be affected by cash flow difficulties. If your clients or customers fail to pay their bills on time and your company’s bank account balance is limited, it could find itself in an insolvent position caused by poor cash flow.

Cash flow problems can also be caused by financial mismanagement. If you invest in new equipment, property or growth at a time when your business is generating a low amount of profit, it could produce a cash flow crisis.

Different businesses often experience different types of cash flow issues, and often for divergent reasons. Some of the most common causes of cash flow difficulties for small and medium-sized businesses include:

  • Extending too much credit to customers, particularly new customers that do not have a substantial credit history and may not be able to pay their debt on time.
  • Offering your product or service at a profit margin that’s too low for you to pay employees, suppliers and creditors while maintaining a reasonable cash reserve.
  • Overinvesting in production equipment, employee training, excess stock or other tangible or intangible assets that have a significant cost but produce revenue only over a long period of time.
  • Expanding your company’s operations too quickly, such as opening retail stores or growing your company’s product selection, while depending on outside financing.
  • Failing to anticipate changes in demand or market conditions, such as an increase or decrease in interest rates, competition from other companies, seasonal demand changes or other events.

How can your business solve a cash flow crisis?

There are many solutions to common business cash flow problems. These include raising money in the form of a loan or venture capital investment in your company or using invoice factoring or discounting to generate short-term revenue.

Some of the most effective ways to solve a cash flow crisis for your business include:

  • Using emergency financing, usually in the form of a business loan, to inject new capital into your business and give it the financial breathing room it needs to pay its creditors and focus on long-term recovery.
  • Seeking outside equity investment in your company to provide more cash and allow your business to overcome its short-term cash flow issues.
  • Generate immediate cash flow using invoice factoring or discounting to get money owed to your business by clients and customers immediately, letting your company reduce the creditor pressure it’s under.
  • Enter into administration to restructure your business and improve its cash flow by making management more efficient or revising its range of products and services.

How can your business prevent cash flow problems?

The best way to solve cash flow problems is by ensuring they don’t occur in the first place. The biggest cause of cash flow problems is overexposure to risk, particularly the risk of non-payment by your company’s clients and customers.

Even if your business is growing and profits are significant, it could still be at risk of cash flow problems occurring if it’s too dependent on a single source of revenue or if its business model is overly risky.

Proactively analysing your company’s revenue sources, its outgoing payments and its major risks, such as increased competition or seasonal changes in demand, will help you avoid cash flow crises in the future.

Insolvency Help and Advice

Is your company struggling to pay its creditors on time? Whether your company is experiencing temporary cash flow issues or has serious structural issues, it’s worth seeking insolvency help and advice to ensure you’re prepared ahead of time.

Insolvency can “creep up” on your business, even if it seems unlikely at your current rate of cash flow and earnings. Issues such as late or missed payments from valuable customers can often place your business in an insolvent state very suddenly.

In this guide, we’ll look at the warning signs of insolvency that you should be aware of ahead of time. We’ll also list situations in which your company should potentially seek advice and assistance from insolvency specialists to protect itself from liquidation.

Could your company benefit from insolvency help?

Many company directors only contact an insolvency practitioner when it’s clear that their company is facing a crisis. Even if your business is healthy, with good cash flow and steady profits, the advice of insolvency practitioners can be very valuable.

An expert insolvency company can help your business locate and fix issues that, in a crisis, could lead to insolvency. In simple terms, they can help your business identify the “warning signs” of insolvency and fix them before they become problematic.

The warning signs of insolvency are various, ranging from invoicing and payment issues to poor cash flow forecasting. Some of the most common warning signs of insolvency include:

  • Problems with clients and customers that pay behind schedule, partially or have defaulted on their invoices.
  • “Tight” cash flow and small profit margins that make operating, even when sales are steady, difficult.
  • Problems paying your company’s suppliers, contractors and employees or situations in which your company spreads it credit to multiple suppliers.
  • Issues paying taxes, such as VAT and PAYE, on time or warning letters from HM Revenue & Customs.
  • Excessive dependence on creditors for growth that may not be sustainable in the future.

From time to time, almost all businesses will experience one or several of these warning signs. An expert insolvency company can advise your business about its exposure to common insolvency warning signs and their potential to develop.

In addition to this, they can offer insolvency advice to help your business eliminate risks before they develop. The best way to prevent insolvency is by preventing your company from leading itself towards an insolvent position over time.

Are you facing an insolvency crisis?

If your business is under pressure from its creditors and it simply can’t afford to pay them on time, the advice of an insolvency company can help you take the right steps to protect your company from being liquidated via a winding up order.

When your company becomes insolvent, you’re required by law to cease trading. An insolvency practitioner can help you work out if your business is insolvent and give you (and your company’s other directors) advice on potential solutions.

Insolvency doesn’t need to mean the end of your business. Whether through a CVA or via pre-pack administration, you can facilitate a company recovery and return to trading with the right advice, guidance and assistance from an insolvency company.

These solutions could include proposing a company voluntary arrangement (CVA) to your company’s creditors in order to reduce creditor pressure and create a new payment schedule that lets your business continue trading.

Other solutions that your insolvency practitioner may recommend include entering into administration, which shields your business from winding up petition, or going into a creditors’ voluntary liquidation to liquidate its assets.

Finally, your insolvency practitioner may be able to enter your business into a pre-pack administration sale. This allows you to sell your current business’s assets to a new company, known as a “newco”, and resume trading relatively quickly.

Remember that your insolvency practitioner won’t just offer advice on what options are available to your company. If you enter into administration, they will also play a vital role in facilitating the recovery of your business.

For more detail on Insolvency, please see our Company Insolvency page.

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