Cash flow issues? More money might not be the answer

by: John Thompson In Turnaround

cash flowBusiness owners experiencing cash flow issues will often say, …’if only I had another £xxx – I could really make this work’.

Throwing money at a problem can hold off decline, but cash flow often isn’t the root cause of the problem. So, before going to see your bank manager, or re-mortgaging, or borrowing from friends and family, consider some of the alternatives.

The first thing to do is produce a realistic cash flow forecast to show exactly what is needed in working capital over the coming trading period.  Then you can look at a number of areas that might yield significant cash:

Look at the existing working capital:

  • Debtors – Is debtor management producing optimum results? Are invoices being produced accurately and going out on time? Are debtors paying on the due date? Can this be improved?
  • Creditors – Can you obtain additional credit?  Can you put in place an agreed repayment plan of historic debt with Trade and/or HMRC creditors?
  • Stock – Do you have too much stock?  Do you have large quantities of old stock that could be sold at a discounted price in a different (possibly export) market?
  • Overheads – Can you reduce your running costs without adversely affecting your market offering?  If so this will quickly convert into working capital

Non-core asset sales– On line auctions can make the disposal of any surplus fixed assets a very effective way to realise the cash that is tied up here. 

Non-core business sales – Subsidiaries that are a drain on the core business can be divested, mothballed or even closed.  An under used strategy here is to sell the business to the existing management.  This can be done on a deferred consideration basis to speed up the transaction. At least you will have stopped the drain on cash and have the opportunity to realise additional cash over the agreed period.

Sale and leaseback agreements – A good way to achieve an immediate cash injection.  Many accountants would argue that it is prudent for fixed assets to be financed over their useful life rather than tying up valuable working capital.

Invoice finance– if you are not already doing so, and you have trade invoices, this can be an excellent way to fund working capital without having to put more money into the business.  There are an increasing number of very cost effective options here that can mean you don’t have to commit to a long term contract and/or commit your whole sales ledger.  If you are already using invoice finance, some of these additional options can still be explored, or, if you have a sensible business plan and the current provider believes in the management team, it is possible to obtain an increase in the pre-payment percentage.

It’s worth noting that if you have cash flow issues, something is not right with your business model. No amount of new money will put this right; it will just mean that the business will survive for longer. Looking at the alternatives allows you more time in which to address the underlying issues.

Are there other ways to find cash flow solutions within your business? We welcome your comments below.

Image by: elycefeliz