Crash Course in: dealing with a cash flow crisis

An important customer has just gone bust, you didn't have your eye on the ball, you've got some major bills to pay and there's no money in the kitty. Help!

by MT Staff
Last Updated: 09 Oct 2013

Don't run straight to the bank. 'You should never go to the bank and say we have a problem, can we have more money,' says Clive Lewis, head of enterprise at the Institute of Chartered Accountants in England and Wales. 'It's vital to show the bank you're in control and it will ask you what other actions you have taken.'

Revise your forecast. 'Start by producing a new forecast. It may be necessary to forecast every day,' says Lewis. 'The idea is to co-ordinate incomings and outgoings as closely as possible.'

Chase what's due. 'Look at who owes you money and apply some pressure,' says Philip King, chief executive of the Institute of Credit Management. 'Too many businesses don't chase cash from their customers, but a collection agency can do it for you.' Threatening to charge statutory late payment interest can help. Some customers may agree to pay early in return for a discount.

Prioritise your creditors. Many businesses would pay wages first, but you may also want to prioritise suppliers you can't do without.

Ask for some leeway. Suppliers will often give you longer to pay if they think it is a temporary problem and you are honest with them, says King. 'Not saying anything exacerbates the situation - they would far rather know if there's a problem, and lots will agree to an extended payment plan.' Target suppliers you have a strong relationship with.

Liquidate stock. Look at other ways to bring in some quick cash. Do you have stock you could liquidate, maybe through a sales promotion?

Clamp down on costs. Look for discretionary costs which won't damage the business. But beware of job cuts. 'You need to judge whether you are facing a short or long-term issue,' says Lewis. 'Cutting jobs can often cost more cash upfront because of redundancy and other payments, so it may be better to reduce hours.'

Look for extra funds. You may well have to ask the bank for an extended overdraft or loan, but do so armed with evidence. 'Show it your invoices waiting to be paid and it's more likely to be supportive,' says King. Invoice discounting or factoring could be an option, but it usually takes time to go through the necessary due diligence. And shareholders may be persuaded to invest more.

Don't let it happen again. If you have robust cashflow forecasting in place, you should know if you're going to run out of money, so keep some cash - or borrowing - in reserve. And credit check your customers.

Do say: 'We have taken the following actions to restore a cash-positive position within 30 days.'

Don't say: 'I'm afraid to tell you there's no money left' (acknowledgments to Liam Byrne, MP).

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