Excluding the businesses that had permanently ceased trading, the majority of businesses that responded to the most recent Office of National Statistics COVID-19 business impact survey felt confident they had the financial resources available to continue operating throughout the coronavirus (COVID-19) period. In fact, 6 out of 10 businesses indicated this and only 6% of all businesses responding did not feel confident, with the remainder unsure at the time of their response.

However, despite this confidence if businesses are to succeed in weathering the coronavirus storm, they are going to need to adopt careful cashflow management practices.

Cashflow is the amount of cash flowing into and out of your business. When there’s more going out than there is coming in you experience negative cashflow, which, if not addressed quickly, could lead to your business failing.

Download our guide on how to handle your cashflow nightmares

With a little planning, you’ll be able to tell if any problems come up with cashflow and do something about.

You need to review the following:

• Symptoms
• Risks
• Common causes of cashflow problems

Once you have established any issues that you may have with cashflow as a result of COVID-19 you can look at:

• Solutions to COVID-19 cashflow issues
• Four alternative cashflow quick fixes

What are the symptoms of cashflow problems

How do you tell if you are about to have a problem with your cashflow? There are some tell-tale signs that you could be heading for trouble:

• You are up to your overdraft limits and payments are being declined
• You are in arrears on your trade credit accounts, rent or tax commitments
• You have, or are running out of working capital on your balance sheet and the business is making a loss
• Paying salaries and dividends is a problem
• Insufficient profitability to draw a salary from the company
• Unable to pay for remedial activities such as relocation or redundancies

Some of these issues could become painfully obvious as the restrictions of COVID-19 start to tighten.

Risks of cashflow problems

Poor cash flow means you risk not being able to fund new orders, deal with tax commitments on time, take advantage of volume discounts, introduce new products or services or grow the business.

There are other risks to your business if you have a negative cashflow, which include:

• The principle risk of a severe cash flow crisis is ceasing trading
• Diminished operational capabilities: Without the necessary capital it may not be possible to continue your normal operations
• Reputational damage: Problems paying suppliers or the inability to deliver your goods or services to customers could damage your good name and brand image
• Poor credit ratings: Continual defaulting on loans and credit commitments will affect your creditworthiness. You will be perceived as more of a risk by lenders and therefore may not be able to secure funding for your business going forward
• Reduced competitive advantage

Common causes

Now you know whether or not you might be about to face a cashflow issue. You are also painfully aware of the impact it could have on your business. But what causes cashflow problems in the first place?

COVID-19 restrictions on business notwithstanding, there is a host of reasons why you might find yourself facing cashflow difficulties. Here are just six common causes of negative cash flow:

1. Low sales: Clearly if you are not selling enough of your products or services your income will be impacted and cash flow into your business will be reduced.
2. Overspending on stock and capital equipment: Spending too much on fixed assets means you have cash flowing out of the business. If you don’t have cash flowing in, you will be in a negative cash flow situation. Similarly, buying too much stock ties up a lot of capital and you may not be able to sell it quickly enough to recoup the costs and deliver a return.
3. Extending customers too much credit: This means that you won’t get paid for products and services upfront but at a later date. Cash won’t flow freely into the business, as it flows out to replace the stock you’ve sold without getting paid.
4. Late payments: Being paid late interrupts the in-flow of cash.
5. Bad debt: Customers who owe you cash can also be a nightmare and chasing bad debt can be costly.
6. Problems with inflexible funding: Lenders or investors may not fund the business if you aren’t trading profitably when you need an influx of cash, creating a negative cash flow. They may require additional security e.g. securing any lending against your home or with a personal guarantee.

Solutions to COVID-19 cashflow issues

The key government scheme for SMEs is the Coronavirus Business Interruption Loan Scheme (CBILS), which was introduced in March and subsequently updated. Read our blog for more on this and how to apply for a CBILS loan. The bounce back loan has now been introduced and is set to go live 4^th May 2020 covering loans up to £50,000.

In addition to CBILS the government is offering other schemes to help businesses including tax payment deferment, self employed income support and the job retention scheme. To find out more about the government support available to you have a look at the online Government Support Finder.

Four quick alternative solutions to cashflow issues

While it is preferable to address the root causes of your cash flow nightmares and find long-term solutions, sometimes a quick fix is just what you need. It’ll get you out of trouble in the short term, giving you the time to plan for the long game.

Here are some quick fixes for some common cash flow troubles:

Manage your customers: Incentivise your customers or clients to pay you more quickly, like negotiating discounts for shorter payment terms. You could also make it easier for your customers to pay by providing more payment options, such as accepting online or credit card payments. And be sure to always check your customers’ commercial credit histories before you extend payment terms.

Make your invoices work for you: Use invoice factoring because you’ll get paid straight away, immediately solving your cash flow crisis. A lender will effectively pay up to 75-90% of an invoice upfront. Then, when the invoice is paid by the customer, the business receives the outstanding amount minus the lender’s fee. This can be done on a single invoice, selective invoices or across your whole debtor book, but is only available if your customers are businesses and not consumers.

Invoice finance provides a quick win where an injection of cash is needed, but it’s not always the most cost-effective solution; you pay for the convenience of speed and accessibility.

Seek short-term loans: Look for short-term business loans or revolving credit facilities (overdrafts) but be careful with this one. Only do it if you know the situation will be temporary and you can repay the loan quickly. This is because these types of loans typically have higher rates of interest than standard loans and could make your cash flow problems worse in the long run.

Trim your expenses: Cut all non-essential services that you’re paying for and try to hold stock materials for as short a period as possible before sale or manufacture. Re-sellers can seek purchase order financing to fund sales that exceed cash flow capabilities. Reschedule payments and renegotiate payment agreements and payment terms with suppliers.

Download our guide on how to handle your cashflow nightmares

Call one of the team today for a free consultation on 0203 327 0567 or email [email protected].

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