Why cash flow will make or break your business

When running a business, due consideration should be taken to cash flow as this can determine the immediate future of your company. Cash flow has the power to damage the prospects of your business or cause a short term glitch in performance if it’s not actively maintained and frequently analysed. As a business owner, it is vital to understand what cash flow is and actively take note of the financial health of your business.

Cash flow is the flow of cash running to and from the business. If the business can no longer meet liabilities when they fall due, this is a reflection of a business in decline. Poor cash flow is a warning sign of insolvency, so if this becomes apparent, you should seek specialist advice from a licensed insolvency practitioner.

Why is healthy cash flow vital for business survival?

The business will be limited in activity without a healthy cash flow as it will no longer be able to replenish stock, pay staff wages and HMRC liabilities such as VAT, PAYE, NI and Corporation Tax, all of which keeps the business afloat. If your business was to receive an influx in customer orders or an insurance renewal quote, a lack of cash available to the business will make it difficult to fulfil.

Poor cash flow can hinder your chances of fulfilling your financial obligations and directorial responsibilities. If you are unable to repay business loans, your finance facility or suppliers, you may face serious action from creditors which could result in compulsory liquidation for your business.

If you fail to pay creditors after a series of attempts to recoup money, you may receive a winding up petition (WUP). A WUP is a serious form of legal action which can be taken by creditors as if the WUP is granted at a High Court hearing, your business may be forced into liquidation.

What are the causes of cash flow problems?

Dependency on key clients: If you win a client which is of high value due to their order volume, this is great news for both the business and staff. However, if you rely on fulfilling services to solely one client due to the value of their custom, the risk is largely populated in one area. In the event that the client switches suppliers or faces closure, the survival of your business will be at risk. Ensure that you distribute the risk by delivering your services to a number of clients so if you were to lose your largest customer, your business will still have a chance of survival.

Poor forecasting: Failure to accurately forecast can negatively affect your business as you may miss seasonal trends, product launches and market announcements which could influence this. For example, Brexit uncertainty has affected company forecasts for UK businesses as the UK braces to leave the European Union with a confirmed deal not yet in sight.

Failure to collect debts: It may be a long-running debt from a once-trusted customer or a few late invoices which are beginning to affect your company cash flow. Failure to recover debt when it is due can quickly take a toll on your working capital and stagger cash flow.

Safeguard your business from cash flow issues

The first step is to find a way to drive income into the business and improve profit margins. You can do so in the following ways:

  • Drum up more sales
  • Attract a wider target audience
  • Chase up late payments
  • Inject cash through alternative finance
  • Seek funding or investment
  • Improve information management system
  • Improve business model
  • Review product and service standards
  • Sell excess stock

If your business falls into the trap of neglecting cash flow and begins to experience problems as a result, this could be remedied with a simple renegotiation with creditors, such as a Company Voluntary Arrangement.

Company Voluntary Arrangement: Renegotiate terms with creditors through a Company Voluntary Arrangement (CVA). If you are facing pressure from creditors to repay outstanding debt, a CVA can halt any legal action from being taken against your company, giving you sufficient time to find your footing and allow for breathing space. A CVA will allow you to renegotiate payment terms with creditors, forming a new payment plan over a fixed period.

Once an insolvency practitioner has formalised the arrangement following agreement from 75 per cent of creditors, the plan will be put into motion, allowing you to continue trading.

Adjust payment terms: If you’re experiencing issues with non-paying or late paying customers as a result of lenient payment terms, it may be time to tighten them.

You could narrow down the eligibility criteria to minimise the risk of non-payment and enforce credit checks before approving customers for credit, ensuring that their borrowing behaviour reflects a strong track record. Once granting credit, request for a minimum payment or a deposit so the customer can make a financial commitment, which will also create a financial profit for the business.

Incorporate tighter payment terms in your fine print by applying interest or penalties to late payments and decreasing the time frame in which you require payment. Before doing so, it’s worth considering if your credit and flexible payment policy is highly valued by your customer and distinguishes you from competitors, as if this is the case, it will influence your decision to amend the payment process.

Through accurate forecasting and effective cash flow management, a business can thrive and develop naturally as the financial structure of the business adapts to suit the scope of the business regularly. On the flip side, failure to adjust cash flow can hinder the business and restrict development. In order to facilitate business growth and expansion, cash flow is one of the driving factors and requires a diligent approach.

About the author

The above blog has been supplied by Keith Tully, partner at RBR Advisory.


Call: 0800 015 1755


The above blog has been kindly supplied by the above mentioned author. The inclusion of this content and any links to another web site, or any reference to any product or service by trade name, trademark, manufacturer, or otherwise, does not necessarily constitute or imply an endorsement or recommendation by D2N2 Growth Hub.


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John O'Donnell
Business Finance Manager
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