Entrepreneurs´ Toolkit - The Challenge: Managing Cash To Stay In Business

Businesses don't fail because of a short-term lack of profitability; they fail because they run out of cash.

In the current economic climate, it's essential to keep on top of your cash flow. You can't rely on credit being readily available when you approach a spell of trouble. So how do businesses make sure they keep the right balance?

The solutions

Cash flow management

As cash flow is the key factor determining business survival, it's crucial to manage the basics.

• Make sure your cash flow plans are realistic and not overly optimistic.

• Keep a handle on your cash flow and how it's forecast to fluctuate at all times.

• Allow headroom in your cash requirements to counter unexpected eventualities.

Business planning

There are many factors to take into account if your business is to maintain a good cash balance.

• Closely manage your stock and debtors to reduce your working capital requirements to a minimum.

• Be wary of overtrading. Higher sales than forecast may seem like success, but they can increase working capital requirements and cause cash shortages.

• Underperformance, for example, through lower sales, lower margins or higher costs, will adversely affect cash flow. Consider reducing overheads to stop the cash drain, but try not to cut the wrong areas.

• Consider approaching HMRC to agree an instalment basis for past liabilities.

• In the current economic climate, think very carefully before committing to a business plan that will require further funding down the line, unless those funds are already contracted.

Managing credit

Where credit is needed, there are some basic rules to consider.

• Get the right balance between equity, long and short-term debt and asset-based finance. Don't borrow short to invest long.

• Consider credit insurance to remove the threat of bad debts.

• Manage your supply chain to gain maximum credit and margin.

• Talk to your creditors early if you need to extend their terms.

• Examine the opportunity for other forms of finance, e.g. grants or tax credits.

• Don't ever commit to buying goods and services when you know you will be unable to pay. There are laws against this!

• If you are confident of success, seek new equity, bank or asset-based borrowing. If institutions won't play ball, try business angels, but don't feed the dragon.

Get help

If you're in trouble and not sure what to do next, don't delay; seek professional help before it's too late.

• If the business is failing, don't sit back and wait for things to improve on their own.

• Don't operate in a mirage of optimism. Depending on the cause of the difficulty, professional advisers may be able to help.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.