The aim of a business contract is to try to provide certainty for both parties.
Cash flow is the measure of money being received into and out of your business. It is different from your profit and loss because it is only measuring actual money movement. For example, if you raise an invoice for a customer, it has no effect on your cash flow. What affects your cash flow is the actual invoice being paid. When cash flow is ‘good’, there is sufficient cash coming in to cover the outbound funds. Poor cash flow is when there is not enough cash to cover the payments you need to make.
Most businesses are likely to experience cash flow problems at some point, and you will not be surprised to learn that it is one of the predominant causes of business distress and failure. It is for these reasons that business owners should always try and carefully manage their business’ cash flow to ensure it is fit for purpose, and most businesses use cash flow forecasts to see ahead. Where there is likely to be a stress point, you should take immediate and proactive steps to address any cash flow problems as soon as they are recognised.
WHAT MIGHT CAUSE A CASH FLOW PROBLEM?
- Failure of a customer to pay their invoices on time or worse still, a bad debt
- Offering too much credit to customers
- Loss of a key customer or source of revenue
- Seasonal fluctuations in sales
- High overheads
- Poor credit controls
- Financial management – e.g., over-investing when profits and subsequent cash flows do not justify
- Failure to forecast cash flow effectively or at all
- Difficulty in anticipating changes in business conditions and taking appropriate action
HOW DO YOU SOLVE CASHFLOW PROBLEMS?
It is entirely possible to resolve cashflow problems by taking early and robust action such as:
Work with your accountant to develop short, medium, and long term cashflow forecasts.
Alongside an accountant, consider all your income and outgoings and consider where improvements and savings can be made.
Make sure that where appropriate you can stage payments for your goods or services, so you get some money up front to cover some of your costs to supply.
Invoice finance and other finance facilities can provide you with quick access to cash.
As soon as you have fulfilled your customers’ orders, an invoice should be raised and issued. Ensuring their accuracy means your customers are able to settle the invoice without delay.
Sometimes it is better not to have some customers at all than some who cause you to incur expenditure but then do not pay you.
Cash flow problems are one of the most common reasons for business failure. Seek early advice from one of our corporate recovery professionals and get your business back on track. We regularly negotiate with third parties such as creditors, suppliers, landlords and HMRC on behalf of clients and assist them to explore rescue options such as Time to Pay Arrangements, alternative funding options, Company Voluntary Arrangements (CVAs), and Administration.