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The key indicator that your business is facing serious cash flow problems is when it can’t afford to keep up with payments as and when they fall due. If you’re coming up against a shortfall in cash, you need to assess if this is a temporary hiccup or a long-term drawback that will likely risk your relationship with creditors and jeopardise the financial health of your company. If this is the case, your company could run into cash flow insolvency if company cash is not promptly revived.

Poor cash flow can lead to the downfall of even the most ambitious of businesses if you fail to cast an attentive eye on the cash position of your business and how it fluctuates over time. It’s natural for company income to dip as consumer demand shifts between seasons, however, failing to act urgently could create a tipping point for your business.

What is cash flow?

Business cash flow is the flow of cash moving in and out of the business such as income and expenditure, also known as cash inflow and cash outflow. Positive cash flow refers to when more cash enters the business and negative cash flow is when more cash leaves the business.

A business with sufficient cash flow will often have enough money stored in reserves or a rainy-day fund to cover unexpected outgoings or a lull in trade. Cash flow is used by the company to cover essential bills and outgoings to keep the business operational, such as purchasing stock and paying wages

A business with insufficient cash flow will fall short of funds and struggle to make ends meet, which can create a domino effect where the business can’t afford to pay staff and creditors.

Without sufficient cash flow, company operations can quickly grind to a halt which is why cash flow analysis is extremely important.

Why is cash flow analysis important?

Cash flow analysis involves an in-depth review of the cash flow statement which details the cash stream of your business, including cash inflows and outflows. A cash flow statement focuses on three core areas – operations, financing and investing.

Cash flow from operations – Operating cash flow is cash generated from conducting operating activities and selling services to customers, including net income

Cash flow from financing – This is cash raised to fund the company, such as through debt, equity, and dividend transactions

Cash flow from investing – This is the flow of cash stemming from investments entering and leaving the business

Cash flow should not be confused with revenue, which is money generated directly from sales, whereas cash flow is the net amount of cash entering and exiting the company.

In addition to the cash flow statement, analysing the profit and loss statement and company balance sheet will provide a transparent view of the cash position of your business. By tracking how your business is faring financially, you can forecast if your company is likely to run out of funds and pre-empt what external support you will require to avoid stalling.

How a poor cash flow record can tip your business to the edge

‘The State of Small Business Cash Flow’ report by Intuit QuickBooks found that 66% of small businesses said that processing time following payment had the largest impact on company cash flow, whereas 34% attributed it to late payments.

According to QuickBooks, insufficient cash flow has a detrimental effect on company operations, such as:

  • 2.2 million people in the UK may have been paid later than expected
  • 57% of small businesses experienced cash flow problems which led them to turn down work and lose out on an average of £26,000
  • 38% of small businesses with cash flow problems have been unable to pay debts

Cash flow is at the beating heart of any business, as without this, the business will no longer have cash available to facilitate day-to-day operations. Using intelligent cloud accounting software, such as FreeAgent, can help automate cash flow projections and flag where an overdue outgoing or incoming payment is due.

What can a cash flow statement tell us?

A cash flow statement will guide you to the root of your cash flow problems by tracking transactions in and out of the business. It will show you how well you manage your money and debt, backed by raw data that can be used to make informed business decisions.

There are many reasons why a company may experience both short-term and long-term cash problems, such as:

  • Legislative and compliance changes
  • Increase in price of raw materials, stock, equipment, or staff
  • Recruitment problems or shortfall of staff
  • Over-reliance on major customers – what happens when the contract ends?
  • Over-reliance on suppliers – what happens if they become insolvent or stop trading?
  • Economic uncertainty – Drop in consumer demand and revenue
  • Lack of monitoring – Missing drops in cash flow and the opportunity to identify trends  

If your company is suffering from cash flow problems, you need to act now before the financial position of your business becomes irreparable. The solution will always be individual to the business; however, here are some of the ways a business can recover from cash flow problems and avoid compulsory liquidation.

  • Formal insolvency procedure: Negotiate an affordable payment plan with creditors to increase cash flow
  • Time to Pay arrangement: If you’re in a cash flow rut as you don’t have enough money to settle your HMRC tax bills, ask for more time to pay  
  • Business finance: Commercial finance can provide a separate facility to fund the likes of company equipment, rather than earmarking general cash flow for this purpose

The key to mitigating your position is by providing forewarning if cash flow dwindles. Investing in cash flow software and a professional advisor to support you throughout the journey can help keep cash flow in check.

Keith Tully is a partner at Real Business Rescue, a corporate insolvency and restructuring expert supporting company directors in financial distress. Keith is a company closure and rescue specialist and can advise business owners struggling with the likes of cash flow problems and HMRC debts.