Boosting A Business By Managing Cash Flow
Richard Tomlinson, partner in the dispute resolution team at Langleys Solicitors,
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looks at boosting a business by managing cash flow.
Recent Covid-19 measures have had a major impact on businesses. The global economy has taken an unexpected turn and business leaders now face immediate challenges, including managing their cash flow.
According to recent research shared in Langleys Solicitors Back to Business report, over half of services businesses have just three months or less of cash reserves. The pandemic has taken a toll on all of us in business and keeping track of cash flow will aid in regaining and retaining financial control.
Why is cash flow important to a business?
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Having a good idea of what is going in and what is going out means that it is easier for businesses to plan and make decisions. Being aware of current funds prevents the risk of making decisions that may jeopardize a business and its future, for example, choosing to make a purchase or investment that isn’t affordable based on the current cash flow. This also applies when considering growth and expansion plans; growth ambitions need to match the funds available and consider the costs involves.
It is a crucial part of business to maintain good relationships with suppliers. If cash flow is an issue, it might mean that a business is unable to pay supplier costs which could in turn harm both partnerships and reputation. Managing cash flow means funds will always be set aside to pay the bills.
Having clarity about where the money is currently being spent enables businesses to evaluate where they might be able to cut costs or where it is necessary to increase expenditure. This clarity can be achieved by regularly checking and updating a cash flow statement to keep track of changes from month to month.
The impact of the pandemic on businesses
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Covid-19 has impacted all businesses, regardless of size and very few have escaped the pandemic without harm. In a year defined by uncertainty and loss, staying afloat has been a challenge for many businesses. It is estimated that Covid-19 will cost SME’s £126.6 billion and around one in ten expect it to cost them more than £50,000 individually.
Finances have been a source of concern for small business owners, with 61% having had serious financial concerns at some point throughout the pandemic. However, there is hope on the horizon, with the end of restrictions looming, 25% estimate that they will be able to return to pre-pandemic levels of trading by summer next year.
How will the end of the furlough scheme affect businesses?
Many businesses have relied heavily on the government’s furlough scheme, however, this is due to end on the 30th September 2021 as by that date restrictions on permitting businesses to open, and work to resume, will be removed, and a further extension will not be necessary. Despite this, the effects of ending furlough will be felt by many. Latest figures show that at the end of May, 30% of employers still had staff on furlough and throughout the pandemic 11.6 million jobs have been supported by the scheme.
When September arrives, businesses will need to take staff back or make redundancies, which could generate a spike in unemployment. In addition, employers may need to hire additional or new staff members, replenish stock and factor in other costs involved in rebooting business.
The increasing need for cash flow during the pandemic
The outlook for many businesses post-lockdown is defined by credit lines close to zero, government grants that have been drained and decimated bank savings. Research from the Bank of England estimates that companies could face a total cashflow deficit of £140 billion after maintaining employment, facilities and equipment throughout the pandemic.
As businesses emerge from the depths of the pandemic, they must learn to walk again without the financial crutch of the government propping them up. Findings from Langleys Back to Business report found that the cost of doing business is the joint top challenge that businesses face over the next five years, so gaining control of cash flow is crucial.
Business owners could not foresee the devastation that Covid-19 would cause, but it has highlighted the importance of having contingency plans and ensuring financial resilience.
The benefits of good cashflow management
The most obvious benefit of managing cash flow is that a business will never run out of cash. It is fundamental that there is enough coming in to be able to pay staff wages and purchase the supplies needed to satisfy demand. Being unable to fulfil these necessities is likely to make for unhappy staff and customers.
If a business owner is unaware of how much is flowing in and out, it is easy to overspend and land in a difficult situation where bills and invoices cannot be paid back. Cash reserves meant for emergencies may end up being used to pay for routine bills, which could be prevented by effective planning and management.
Controlled cash flow puts a business in a position to embrace growth opportunities and not be held back from expanding and rivalling competitors. It is always in a business owner’s interests to improve efficiency and quality, but the funds have to be available to do so.
Finally, it is easier to sleep at night without cash flow worries. With research showing that 3.7 million small business owners experienced stress over lockdown, getting finances in order can reduce this burden. Having peace of mind that bills can be paid on time means that focus can be put on looking for opportunities to grow and progress, rather than time being spent on counting the pennies.
The steps businesses can take to manage cash flow
Having a good idea of the income that is needed to break even is a good place to start when managing cash flow, and means businesses can build up from there. It may be the case that there is potential to reduce outgoings and expenses when the cash flow is analysed, meaning that there is a bigger lean towards money coming in, rather than going out.
In contrast to pre-pandemic times, it is important for businesses to prioritise generating cash over making a profit because that is what will pay the bills. With that in mind, here are some steps businesses can take to help to manage cash flow and ensure they are paid what they are owed.
Stick to the terms of the contract
Contract terms are important and businesses should be aware of what they are and stick to them. Invoices should be sent promptly to ensure payment is received on time and the process is as easy as possible.
Maintain strict credit control procedures
Invoice reminders should be sent out every 14 days until payment is made and if it isn’t, businesses should consider threatening Court action or insolvency proceedings.
Know the customers
Customers who consistently pay late should be monitored and business should have frank conversations with customers about the reasons for late payment. This means businesses will always be aware of any changes in circumstances and allows for appropriate planning and tackling of the issue.
Consider stopping work
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In some cases, it may be necessary for a business to stop providing services or products to a company that owes debts. Although this should be approached with caution, as there are risks involved.
Get it in writing
If a customer needs more time to pay, a business should make sure it’s in writing and the validity of the debt is accepted. This should be accompanied by written acceptance that the customer has no concerns about the quality of services or goods that the business has provided.
Set up an instalment plan
Another option is to set up an instalment plan if a customer cannot pay the amount owned in one payment. However, if a payment is missed, it should be confirmed via a clause in the plan, that the whole amount is payable immediately.
Add interests and costs
Some contracts allow interest to be added to late payments, which is why it’s important to be clued up on the contract terms. For B2B contracts, the Late Payment of Commercial Debts (Interest) Act 1998 implies into qualifying contracts a charge for interest, a fixed sum, and the costs of recovery. These charges can be added to overdue invoices.
The most commercial solution may be to accept part payment of the debt and final settlement. Any communications negotiating such an agreement should be marked as ‘Without Prejudice’ and document the precise terms of the settlement, so they are clear to both parties involved.
Being in control of cash flow makes a business run smoothly. There are simple steps a business can take to manage cashflow and ensure that payments are received in a timely manner. After more than a year of uncertainty, establishing clarity on the finance front puts a business in the best possible position to bounce back and take steps towards future growth.
To find out more about how businesses can manage cash flow and bounce back visit Langleys Back to Business hub: https://www.langleys.com/backtobusiness
Richard Tomlinson joined the firm’s Lincoln team in early 2019, dealing with a broad range of disputes and litigious matters for both businesses and individuals.
In relation to businesses, he regularly deals with: contract disputes (including sales of goods or supply of services, business sale and purchase agreements, partnership agreements and franchise and agency agreements); professional negligence claims; breaches of directors’ duties; property litigation (such as contentious lease renewals and dilapidations); construction disputes; intellectual property disputes; debt recovery; and the enforcement of restrictive covenants.
For individuals, Richard regularly handles: all of the matters above (to the extent they relate to an individual); shareholder disputes (including minority shareholder disputes);consumer disputes; landlord and tenant disputes; boundary and neighbour disputes; breach of trust disputes; and contentious probate matters.
Having spent over a decade dealing with disputes, Richard has fostered considerable knowledge of Court processes and procedures and has dealt with an incredibly broad range of matters. He regularly acts in both the County Court and the High Court, and has also handled matters in the Court of Appeal.
Having acted for individuals and businesses of all sizes – from small, fledgling SMEs / OMBs to international companies and government departments, Richard has developed strong commercial awareness and an unwavering focus on his client’s desired outcome in any dispute.