Are you in control of your cash flow?
A guide for Businesses in Distress by our Insolvency Practitioners
During the Covid-19 pandemic, many thousands of businesses were only able to survive due to the package of Government financial support. Now that this support has ended, companies needed benign trading conditions to start catching up so that they could afford to repay their Covid loans and begin to grow again. With the war in Ukraine, the associated increase in energy prices, supply chain problems, rapid inflation and post Brexit settlement issues, that has not happened. The latest insolvency statistics for Q1 2022, show a 112% increase in Creditors Voluntary Liquidations compared to Q1 2021 and it will be a surprise if this trend does not continue when the Q2 figures are published.
Many companies are just about surviving, and now is the time to take action to avoid collapsing into insolvency. Cash is still King when it comes to the survival of a business. In this article, one of our Licensed Insolvency Practitioners, Antony Batty, explains why and looks at some of the actions that companies should take to improve their cash flow and their prospects during these challenging times.
Cash and Cash flow. Get it under control
As Antony Batty says:
“Cash and cash flow are crucial to the success of any business, especially now. However, in our experience, it is also true that many businesses are not particularly good at managing their cash and cash flow.”
As Insolvency Practitioners, we will always tell you that if a business does not already run one, then a cash flow forecast must be prepared. Accountants will say the same. There are many advantages a cash flow forecast brings, but the key ones are: control and being able to predict accurately.
A cash flow forecast allows directors and managers to understand how important good credit control is and where potential pinch points are in the business’s working capital. Once in possession of accurate cash flow information, managers will be in a much better position to take the right decisions needed to overcome a problem, for example, by reducing costs or negotiating delayed payments to suppliers/creditors in the most time efficient and effective manner.
Put simply, a cash flow forecast is vital to understand your business’s pinch points, meaning you can talk to suppliers or other key creditors (your bank or HMRC) in good time and with an understanding of where the business is and where it is heading unless action is taken. This will impress your creditors, and, in our experience make it easier to negotiate agreed time scales with them if the business is going through a period of distress and needs a breathing space.
A cash flow forecast gives a business the discipline it needs, and this is just as true in the good times as it is in the bad times. Crucially, a cash flow forecast can help a business anticipate a downturn in trade more quickly than otherwise, and will work with its advisors, including insolvency practitioners, in order to turn things around.
What Sort of Cash Flow Forecast do Businesses need?
A rolling 13 week fully integrated cash flow forecast is normally considered the one to go for.
- A rolling forecast means that it stays current, but also becomes historic in short time periods, helping managers make good decisions about the future, record the present and understand and learn from the past.
- The fully integration simply means that the cash flow links to the profit and loss account (as it must) and the business’ balance sheet as it should.
Can a Cash Flow Forecast Save a Business in Financial Difficulties?
Businesses become insolvent all the time and for many reasons. There are also times when not a lot can be done if the reason is because of some sort of unpredictable external shock or rapid change in tastes/demand. A cash flow forecast will allow businesses to respond to difficulties more quickly and make better decisions along the way.
We see many businesses become insolvent due to a lack of information about the business and how it works and this leads to a lack of control. In our experience, a distressed business can go a long way to improving its outlook by focusing on cash flow.
Having a cash flow forecast is only the start, of course, it is what you do with it that really counts. Generally speaking, we recommend that the following are considered and taken into account when responding to financial difficulties:
- Take early specialist professional advice from an accountant or an insolvency practitioner. Work with them to make a plan, and stick to it
- Accept that nothing is sacred or not on the table
- Produce the numbers you need – cash flow – to inform your decision making
- Control all spending
- Ensure all collections of money owed are made as per contractual terms. Outsource if necessary
- Always make decisions based on facts and information not emotion
- Always talk to your key creditors early and get their support if there is a problem
- Do not give away or sell assets off cheaply
- Treat all creditors equally
The cash flow forecast is at the heart of all these decisions.
Talk to our Insolvency Practitioners for Help and Advice
Insolvency practitioners are not just here for the times when administration and liquidation are the only options. Very often we play an important role in helping businesses in distress take the action needed to help turn things around, especially in difficult and uncertain times such as these. Cash flow forecasting is just one of those tools.
Also, K&W Recovery, trading as Antony Batty and Company, Thames Valley: