If your business is struggling, there are several options you should consider well before you turn to insolvency or sell off assets.
Often, external advisers may recommend formal insolvency and sale or liquidation, when fast improvements to cash flow can have a more immediate impact on the health of a business. As we know, cash flow is king.
So, if you’re facing serious challenges, now is the time to sit down with your own accountant to investigate all the solutions available to you and put arrangements into place that could boost your cash flow considerably, keep your creditors at bay and give you the best possible chance of trading out of difficulty.
The reality is that with good money management, negotiations with creditors and devising a workable budget to boost your working capital, you may be able to avoid insolvency, avoid significant consulting fees from insolvency practitioners and pre-insolvency experts and return to profitability.
Step 1: Renegotiate payment terms to improve cash flow
The first thing to do is to sit down with your accountant or adviser and develop a comprehensive understanding of your financial situation,your immediate payment obligations and the state of your debtors ledger.
Work out who are the most important creditors are, that is, those that need payment first, and then approach them to try renegotiate repayment schedules or even negotiate for payments to cease, for a period of time. This is when you can lean on past experience with those suppliers and ideally, your loyalty to them.
That may help you to free cash flow to meet other urgent financial commitments and give you time to help get your business back on track.
Step 2: Actively manage your expenses
If your business is on the edge and you haven’t reviewed your expenses, then now is the time. Set clear rules in areas such as travel, entertainment and accommodation and ensure the rules are followed. You will be particularly reliant on your staff at this time so ensure you do what you can to retain and energise them to work to this plan.
It's important here to be as objective as possible. That means that when it comes to bonuses and fringe benefits like business lunches or a fancy company car that the boss drives, then you need to review even these expenses. If they aren’t essential to the running of the business or to adding value for clients, then now may be the time to cut those perks if that’s what you need to do to avoid insolvency. This ‘lean’ methodology should ideally become part of your approach going forward.
Step 3: Replace short-term debt with long-term debt
The other option to boost your working capital is to replace short-term debt with long-term debt or refinance existing debt to take advantage of lower interest rates. It’s always worth asking your financier for more favourable terms because the answer just might be yes, especially if you’ve been a loyal customer. You will need to ensure in these discussions that you are able to communicate a clear plan to turn the business around. Their support in these situations is crucial.
Step 4. Manage your debtors ledger to increase working capital
This is the time to focus on cash inflows as well. Identifying slow-paying debtors and intensifying accounts receivable activity will help keep the cash flowing. Where possible, seek or increase deposits, focus sales activities on larger clients who pay sooner, and also do not shy away from using a debt recovery agent if you suspect some debts to go bad.
Prepare a cash flow forecast to understand your cash position into the future. Thinking ahead can be your business’ best chance of success.
Step 5: Ask suppliers for discounts to improve margins
If you haven’t already, try boosting your working capital by renegotiating supply agreements with those you have a good relationship with. If you’re an important customer, then use this to your benefit.
Ways of doing this could be to commit to earlier payment or consolidating supply from one provider and ordering a greater amount if you can and asking for a discount on future prices.
Step 6: Reduce unnecessary stock
Holding unnecessary levels of the stock or the wrong type of stock will reduce your working capital. Monthly or quarterly stocktakes are important to managing what stock you need, and that which you don’t. Look at your sales book and this will help guide you on deciding what sort of stock you should be keeping and what isn’t moving. Active management here can boost your cash flow. If you carry products that don’t sell or deliver the right margins, consider pruning them from your lines. Focus sales on those products which will deliver higher margins into your business, and sooner.
Step 7: Invoice finance and working capital options
It’s important to investigate alternative forms of financing to boost your working capital as you may or may not not have the full support of your financier through this period. Working with a financier who has demonstrated an ability to be flexible and understanding should provide your business with something of an insurance policy.
Invoice Finance businesses can generally work alongside existing financiers to ensure the business maximizes the working capital available to them. Additionally, they often do not require real estate security which provides added peace of mind. It is the additional working capital provided by the invoice finance facility which can be put to use quickly to pay off creditors and tax arrears and restore confidence in the business before the situation reaches the stage where only expensive insolvency proceedings can resolve them.
Invoice finance is a very useful and cost-effective tool to that can improve your cash flow and increase your working capital to give your business the best chance of turning around and surviving. Also known as invoice or debtor finance, providers typically pay up to 80 per cent of your outstanding invoices within 24 hours of you applying. The balance (less fees) generally becomes available to your business when the invoices have been paid by your customers.
FactorONE clients can benefit greatly from invoice finance, which can help overcome cash flow difficulties and enable you to pay your creditors on time to maintain relationships and keep your credit rating intact.
Step 8: Protect your credit rating
There is one very good reason that you should avoid insolvency if you can - it will damage your credit rating severely and your future livelihood. That’s why it’s important to avoid take these above steps to boost your cash flow first.
You credit rating includes information about your credit history, including any defaults. A default is an overdue payment of more than 60 days where debt collection activity has begun. Keep this in mind if you’re at 58 days and your supplier has threatened collection. This is where debtor finance can have a crucial role to play in not only helping you pay your creditors, but to avoid a credit rating downgrade.
Cash flow is often the root cause of instability in a business, so tackling it quickly with a multi-pronged approach is often a far more effective solution to formal insolvency proceedings or expensive consultants, at which point expensive consulting fees and a long protracted and stressful process comes into play. Thankfully, there are numerous options available to inject cash into a struggling business to help, so it pays to review each and work to a plan which combines them all.
