Surviving a cash flow crisis

Businesses rarely go bust due to losses, but always go bust due to running out of cash.

It’s fair to say, as a country, we’re no stranger to a crisis. Whether it’s Brexit, the 2008 recession or, of course, the recent coronavirus pandemic, in the past 20 years alone, the UK has been through its fair share of economic turmoil.

When businesses grind to halt, the threat of redundancies becomes all too real and spending is the last priority on everyone’s list, it’s then that businesses start to see their own internal crisis; cash flow.

What is cash flow?

Cash flow is, in simple terms, the money that comes in and out of your business. Your cash inflows are generated through sales, money earned through investments or borrowing. Your cash outflows are, of course, the opposite to this – this is the money that leaves your business through expenses, payments to vendors or suppliers, wages and equipment purchases.

All businesses experience fluctuations in cash flow. It’s a threat that is all too common in the struggles of running a business. And whilst some companies prepare and plan ahead for these cash flow issues, it’s sometimes impossible for others to get through them.

In fact, according to Business Insider, 82% of businesses fail due to them experiencing cash flow problems. So, imagining how hard it is for a business to deal with cash flow in ‘normal’ circumstances, when a global crisis comes along, how are businesses able to prepare for situations that nobody could have planned for?

As experts in financial services, at Peak Cashflow we want to give you the facts on how you can work your way through cash flow problems – both in the short and long term.

As cash flow situations are inevitable in any field, it’s important to not only consider how to ease them during a worldwide crisis, but also how you can ensure healthy cash flow when it’s all a dim and distant memory.

We use the 2008 recession in the UK as an example as to how businesses dealt with financial pressures in an economic downturn. Although the coronavirus pandemic is a very different ‘black swan’ event to the last recession, we can very easily take inspiration as to how businesses dealt well and ‘not so well’ with financial pressures.

Companies who were proactive enough to plan ahead for general cash flow problems were already in good stead to deal with such issues as sales dropping, late payments by vendors and building expenses.

Those companies who had already factored in cash flow fluctuations into their business plan were able to adjust to the changes much more quickly than those who were reacting to the recession. This is where those who hadn’t prepared fell short, and experienced the bigger impacts to their business against their competitors.

Short term cash flow plans

So, you find yourself in the middle of a global crisis. How are you going to deal in the short term? Obviously, as we mentioned, it’s best to prepare for a variety of cash flow issues ahead time, but if you are looking to immediately improve your cash flow you should:

Step 1: Monitor your accounts payable and receivable
Although we’d recommend always staying up to date with your accounts payable and receivable, it’s even more vital during a crisis.

By analysing exactly who and when you need to pay a vendor or supplier is key, but it’s also important to consider how this will affect your customers too, who will no doubt be experiencing their own cash flow problems.

This means not only being aware of the cash going out of your business, but also when cash is coming in, which will help you prepare for any delays in paying your own suppliers. This is of course when communication is key – with both your vendors and customers.

One way of combating late payments is by encouraging faster payments from your customers. Whether you use an invoice finance facility or not, ensuring your customers pay promptly will always result in a smooth flow of cash in the business.

Step 2: It doesn’t always pay to stock up
Some businesses run on a bulk buying stock process, to ensure access to the best savings from suppliers and to provide the most cost-effective products to their customers.

Although securing stock during a pandemic may become a pressing issue for your company, it’s important to consider that people’s spending drops dramatically in an economic crisis. Depending on the type of product or service you provide should of course be at the forefront of your buying decisions.

As stock makes a huge impact on cash flow, only buying what you can afford and what you think you’ll need is a very simple short term goal to control the amount of money leaving your business.

Step 3: Discounts
Although this may not be an option for all businesses, securing discounts with suppliers is an effective way of reducing cash flow during unprecedented times.

Bigger businesses or corporations that you work with may jump at the chance of negotiating longer-term agreements with you, particularly if this means that they can continue to work with you after a particular crisis.

By asking the question as to whether they will agree on a discount for extending a contract doesn’t hurt, and it may allow you to reduce costs in other areas of your business to improve your short term cash flow situation.

Long term plans

Step 1: being prepared
As we mentioned earlier in this article, preparation is key when it comes to cash flow.

It may sound like an easy step, but many businesses neglect planning for the future ahead of sorting out what’s going on in the present.

It’s vital that businesses constantly review financial statements to understand monthly outgoings so if the worse is to come, you can always be fully prepared for such situations. It’s not possible to plan and prepare for every global crisis before it even occurs, but any issues you may have with cash flow now will still be an issue during and after a significant event happens.

With this in mind, it’s important to review your finances regularly, and if you struggle to keep on top of this it could be worth looking into some additional help to stay on top of your cash flow.

Step 2: establish a line of credit
A line of credit is when a lender makes an amount of money available to borrow as and when you need it. This is particularly useful during a crisis or when you are experiencing cash flow issues.

Although it can be difficult to secure funding during a crisis, if successful, having this line of credit available to you can help a variety of businesses, including SME’s that deal with cash flow fluctuations regularly.

Step 3: be quick to do your research on additional support
The government is often quick to put additional funding and help in place to benefit businesses who are struggling financially.

Particularly during the recent coronavirus pandemic, the government provided £30 billion of support to the economy which included the Coronavirus Business Interruption Loan Scheme and Coronavirus Job Retention Scheme.

For businesses who were concerned about the impacts of the pandemic, this funding helped to support immediate cash flow issues, including money for suppliers and a percentage of staff wages.

Although this is classed as a short term influx of cash into a business, without this additional support, many more businesses may not have been able to survive past the pandemic.

In the long term, business loans are also there to help improve your cash flow, providing financial support for your business, whatever your situation. By making plans and utilising this additional support correctly, you could help to improve your cash flow on a long term basis.

An experienced cash flow specialist can also be there to guide you through every step of the way during these unprecedented times and beyond. If you are struggling to keep your cash flow in check, it could be worth discussing this with someone outside of your business who can advise you on your options.

Here at Peak Cashflow, we can help and advise you on your cash flow issues, anything from a global crisis to an everyday cash flow situation. From asset to trade finance and other funding solutions, our experienced team can give you all the necessary help to support you, most importantly when you need it most.

If you’re a business owner or financial director and are seeking help and advice with your cash flow, one of our experts will be more than happy to help you. So please contact us today on 0121 236 7575 or email us on info@peakcashflow.co.uk and we’ll get back to you shortly.