5 do’s and 5 don’ts if your business is running short of cash

It’s a fact of business life that cash reserves will sometimes run short. The art of survival is how you respond to these lean periods. Here are some essential do’s and don’ts.

Do

Cut out any non-essential expenditure – over time, a business can build up any number of small expenditure items that really aren’t needed, subscriptions are a prime example. Reviewing your direct debits and taking the axe to these can save hundreds of pounds or more each month relatively painlessly.

Take the maximum credit from your suppliers – while it might seem unfair to pass your problems down the line, the chances are other businesses are already doing the same to you. We don’t advocate paying late or creating a situation where your creditors could take enforcement action against you, but if the payment terms are, for example, 30 days, there is no reason for you to pay any earlier.

Take a hard look at the contribution of every individual in the team – redundancies are unpleasant, but at the end of the day, you employ people to create profit for the business, not to maintain their lifestyle. If people aren’t contributing and cash flow would improve without their overhead, they need to be let go.

Create a cash flow forecast – even if you’re not confident with financial planning, you need to calculate what you have coming in and going out, so you know if you will have enough money to pay important overheads like salaries and tax when they fall due. CaFE has been designed to make this task as simple as possible and will use the information in your accounting system to create a projection for you without any manual input. Ask your bookkeeper or accountant for help if you need it.

Talk to your bank – there is always merit in keeping your bank in the picture, even if you fear this will add to the pressure on you. A good bank manager will be able to give you advice and if short term assistance is needed, prior notice will give him or her the opportunity to assess your needs properly.

Don’t

Fall into arrears with HMRC – VAT and other taxes can be the main causes of cash flow headaches, but it’s unwise not to pay them. HMRC is known to be getting increasingly firm with businesses in arrears, including issuing more winding-up orders. If you really can’t pay the bill on time, you should discuss the situation with HMRC and try to agree an instalment plan.

Cut new business activity – everybody cuts the marketing budget when cash is short, even if all the text books say that you shouldn’t, but at the end of the day, you can only spend what you’ve got. If you can’t keep marketing going, you need to increase the activities that take more effort than cash: more phone calls, more networking and more use of LinkedIn are all examples of what you can be doing.

Draw any more from the business than you have to – you started your business to give you the lifestyle that you aspire to and will no doubt have made a lot of sacrifices along the way. Now though is the time to tighten your own belt as much as you can. A need to reduce your drawings can often throw all other overheads, including people, into sharp focus and encourage you to take action elsewhere.

Try to borrow your way out of difficulty – this rarely works. A short-term blip can be covered by a working capital facility, but you need to be very confident about how and when the turnaround will happen. Borrowing just to buy more time will leave you with a bigger headache if the turnaround doesn’t happen. If necessary, there are businesses recovery and restructuring experts that can discuss your options with you.

Let your world close in on you – this is the most important piece of advice. Hard though it is, you shouldn’t let your situation adversely affect your mental health. Every business owner worries about cash flow at some point and many feel anxious every single day. Ask for help from a business mentor or a trusted friend. Talking about it can often help you see the options that you can’t see for yourself. A chat will also crystallise the need to take action and generally make you feel less alone for having shared it.

November 19, 2018 by Emily Benton Categories: Accountants and bookkeepers