Cash flow problems can be caused by many things – revenue dropping off, costs increasing, not being paid by large customers, technology changes and taking on large new contracts are among the more common ones.
As a business leader, when your cash drops it is very stressful and heart breaking, particularly if your business might fail as a result. All your employees are counting on you to keep their jobs safe and pay their wages so they can live their lives without additional concerns.
We have managed businesses with cash flow problems which are close to failure and have lived through that emotional assault course. Don’t give up and we recommend working out your options straight away and then action them as quickly as possible.
The priority is to conserve cash.
Here are our top suggestions:
Run your cash flow forecasts NOW
Running your cash flow forecasts seems like an obvious step. I remain surprised at the number of businesses that focus on revenue forecasts and profits in a time of cash flow problems. Having cash means the business survives, without it, the business fails. Therefore cash (not profit) is the critical focus.
You need to know exactly where you are for the days, weeks and months ahead.
Break your cashflow forecast down into weeks then days depending on how low your cash gets. There can be large swings back and forth within the days and weeks that you do not see with the monthly picture. The monthly cash may look okay, and then the weekly one shows the company running out of cash mid-month.
Make sure you include all the cash payments you will make – salaries, offices costs (rent, rates, utilities, cleaning), IT equipment, stock investments, supplier payments, tax payments, loan payments and any other payments.
Against these payments, set out the income based on when you are going to be paid by your customers. Then look at what your cash balance looks like each day or week. Work out how long your cash will last.
Don’t make broad assumptions. Getting the detail right is important and will give you confidence.
Let’s look as some ways to reduce or delay cash payments.
Talk with suppliers to delay cash payments
Ask your suppliers if you can delay payments to them.
Suppliers want you to survive because you are their future sales. When cash flow problems hit, suppliers can provide the quickest help so pick up the phone. Make sure you have your cash flow forecast to hand and you have a realistic date by which you can pay them. Make sure you stick to what you have agreed.
What you can’t afford is that the supplier thinks you are going to fail and then stops supplying you or asks for payment in advance. Being organised (with your forecast), honest and trustworthy will help achieve this. It is definitely time to call in those favours you have built up by treating your suppliers well to date.
Other suppliers such as landlords will have their own challenges like paying mortgages, so they may have less scope to help. Ask them for a rent holiday or work out a payment plan that give you lower payments now.
Talk to the bank about your cash flow problems
This is a harder conversation. The bank is much less worried about future sales and very concerned about getting back whatever the bank has lent to you.
Explain what the issue is, how long it will last and the actions you are going to take to ensure that you can repay your current lending. Banks are used to dealing with businesses with cash flow problems and it is critical that you are organised, proactive, open and have thought everything through. You bank is an important investor – treat them as such.
Explore with the bank if you can borrow additional funds for the length of time you need. They can be surprisingly supportive if you take the right approach.
Speak to the taxman
HMRC has various schemes to help businesses with cash flow problems such as Time to Pay. If you have been a good payer to date, explaining the issue and asking for a delay to payments often gets a supportive approach.
If you have been a poor payer to date (i.e. late etc) then this will be a harder win. Be warned that the taxman can also demand payment and levy fines and interest – essentially make your cash flow problems worse or cause your business to fail. We have always found being honest is the best course of action.
Talk to customers
Ask to be paid early.
This is not a step to be taken lightly. You don’t want your customers thinking you’re about to fail. If you don’t have many other options left, then pick up the phone and ask if they could pay early. If you have to explain you have cash flow problems, make sure you frame the cash flow problems as temporary.
Most customers want to support key suppliers. It is a pain and a risk to find and negotiate with a new supplier, especially on a tight timeframe so customers want you to survive.
Cut out all non-essential spend
This could be cutting business class for overseas trips, banning taxis, or reducing your stall size at the next trade fair. The opportunities usually exist in most companies to reduce these types of costs by 10-20%.
Be strict. If the spend will not help maintain or generate sales, don’t spend the money. You need a pay back of better than 1:1 for all payments you make.
Reduce training, marketing and other medium-term benefit costs. Be careful not to impact costs that hit sales now. Go through every line of your P&L with your finance team. Reduce where you can now.
Reduce staffing costs
This is a most difficult cost to reduce. Your business is your staff in most cases; therefore you don’t want to lose staff unless you have no other choice. We hope your staff have been loyal and have helped build the company to where it is, so you feel obligated to be loyal in return. The emotional connections are significant.
Assuming you want to keep staff while you wait for an upturn, then we suggest the following:
- Reduce the hours that staff work – say from 5 days down to 4 or 3 days per week and reduce pay accordingly. This assumes that the level of work has decreased, or you can decrease it. You may need to get your staff agreement if you don’t have suitable clauses built into your employment contracts. This reduces your costs without making redundancies.
- Ask your staff to take an unpaid leave. If they are willing to take 1, 2+ months, you save yourself the salary costs and your staff know they have a job to come back to.
- Deal with your poor performers. This can often be put off by line managers. When cash flow problems hit, you have to manage the poor performers. Put them on personal improvement plans or make them redundant. Move them out of the business quickly or improve their performance.
- Ask your staff to take a temporary salary cut while times are bad. If the sector or wider market is also in a similar position, then your employees probably won’t be able to move easily. If you are the only person asking, then your brightest talent can find better paying jobs elsewhere. And quickly so be warned.
- As a last resort, make redundancies. This saves salary costs and results in you losing staff, capacity and capability. Not good for the long term.
Innovate and create a new way to sell to your customers
This may be hard to do quickly. Think outside the box. If survival is key, then do what is needed.
If your customers can’t come to you, can you take your products to them. E.g. Restaurant adding food delivery.
Make a new in demand product with your current capabilities and equipment. E.g. distilleries making alcohol hand sanitisers.
Read our Article “Don’t give up – Innovate” for more ideas.
When cash flow problems hit, you need to act. Usually quickly. Consider all your options, make a plan and then deliver it. You can manage your way through cash flow problems. Many companies have and you can too.
Give Jess or Anna at Emerson Nash a call and we can help you consider the options though to helping you implement solutions. 0203 500 1200
Emerson Nash are hand-on management consultants specialising in Business Performance Management. We have help businesses with sales of £20 to £120m in CVA and those on the bring of failure stay alive and recover from cash flow problems.