Cash Flow
Review your working capital and cash flow forecasts. If you don’t do them, now is the time to start. It’s important to quickly determine whether you can survive the impact on current reserves and working capital, or whether your business is likely to run out of cash in the near future causing pressure on your supply lines and putting your own business at risk of insolvency. Identifying when a cash flow problem is likely to occur is the first step to evaluating your business so that you can put in place plans to remain a going concern.
Remember cash flow is a problem that all businesses will encounter and can be managed with careful planning as long as you are confident that the business can remain or become profitable in the long term. Before you take any further action you must assess whether your business can return to profit despite the loss of the customer.
This is not an easy exercise: you must review your profit and loss forecasts and ascertain whether the income from your other customers is sufficient to cover the fixed costs of your business and generate a profit. If you need help with this, discuss with your accountant or contact a restructuring advisor who has expertise in forecasting.
There is no point in addressing a cash shortfall if you can’t demonstrate profitability: if the business isn’t going to be profitable on its current fixed cost base, you must review what fixed costs can be eliminated. Typically this may mean making redundancies, cutting out unnecessary expenses, reducing salaries and possibly downsizing premises. Whilst these actions themselves can cost money, as long as they will return you to long-term viability then you should act sooner rather than later. Unnecessary delays, however hard some of these decision can be to take, can make the difference to whether your business will survive or not.
Once a plan has been drafted you will need to look at whether you need additional finance to action these and bridge any working capital gaps in your current cash flow.
If you are reluctant to take on more debt through ‘traditional’ means (bank loans, overdrafts and increases in facility drawdowns) there are other options to help alleviate short term cash flows, such as:
You should also talk to your bank / finance provider about how they can help with cash flow, or consider whether an alternative lender may be able to offer you facilities which provide you with more working capital. In all of the above, if you are unsure, get help from a suitable restructuring professional; engaging their services doesn’t mean your business will fail – it will hopefully keep it viable.
Whilst we all know it’s good business practice to not have all your eggs in one basket and be over-reliant on one customer, in reality this isn’t always possible. Although the insolvency of the customer isn’t your fault, could you have spotted the warning signs earlier? It’s tempting to focus on turnover, but you should try to keep all of your customers under ongoing review by checking credit ratings, industry news and analysing their payment patterns to identify changes. If you are concerned that payment time is creeping up or they are increasing their credit with you then you should contact them for a meeting at the earliest possible stage.