5 Tips and Techniques for Restoring a Healthy Cash Flow in Times of Hardship

moneyMost companies experience cash flow challenges within the first few years of operation and, for a large percentage of those businesses, the obstacle of high operating expenses and compounding debt proves to be too much to handle. Whether you’re having trouble landing new clients, or are dealing with the unforeseen consequences of overlooking important startup costs, the fact remains that the only solution is to take aggressive and calculated action in order to reduce expenditure and increase the availability of income so that it can be used to make crucial investments and pertinent debt repayments.

Here are five ways you can minimize the impact of financial obligations and restore your company’s cash flow to an acceptable level:

1. Reduce Minimum Repayment Requirements

When you’re devoting a significant percentage of your monthly income to repayments it can be difficult to find the funds needed for prime investments and expansion opportunities. After all, it is counterproductive to neglect your company’s credit rating in favor of focusing on business outreach and development as that action would be hypocritical given that damaging the company’s credit score would be detrimental to progress. So how do you reduce the amount you make in repayments every month without hurting the company’s credit score? Informal negotiations may work if you have a solid gameplan and keen communication skills; however a formal procedure like a debt consolidation loan or company voluntary arrangement (CVA) is much more likely to facilitate a successful outcome.

2. Eliminate Unnecessary Overhead and Payroll Expenses

Increasing profitability to free up cash flow can seem like swimming against the tide when every month you have to pay suppliers and employees money that could’ve otherwise been counted as profit. Of course, firing all employees and doing away with your suppliers isn’t an option, but consolidating positions and revising or terminating employee/supplier contracts is certainly a practical course of action. In addition to determining which employees and suppliers you’d like to keep, you’ll also want to brainstorm on ways to reduce your dependency on excessive inventory or services that are nonessential to the continuity and progression of your business. Some of the options you may want to consider are: getting rid of unnecessary bills (i.e. – magazine subscriptions, company mobile phones, etc.) reducing energy expenditure, or using a CVA to renegotiate contract terms in a cost-effective manner.

3. Examine Available Invoice Discounting and Factoring Services to Access Future Invoice Payments

If your main problem is accessing funds that are owed to you in a timely manner (i.e. – if your clients pay on a 30-day or 60-day credit basis) you may be able to get an advance against your outstanding invoices using a financing solution like invoice discounting or factoring. These services would provide access to a loan or line of credit equal to a predefined percentage of your current sales ledger, sometimes up to 90%. So if you’re currently owed £10,000 in outstanding invoices you could access up to £9,000 of that instantly in the form of a loan or line of credit, depending on the terms of the agreement. Keep in mind that in order to be eligible for such financing you would need to show that your clients have a reliable history of making payments on time and in full.

4. Perform a Partial Liquidation or Apply for Asset-Based Financing

If you have any valuable assets (i.e. inventory, equipment, vehicles, electronics, property, contracts, pending invoice payments, etc.) you may be able to sell some of these at market value to generate quick cash, or use them as collateral in obtaining a secured loan. Remember though, if you default on a secured loan then the assets or asset class you used as a security could be seized by the creditor in a Court procedure that could also put your company out of business, so there is some element of risk to consider with asset-based financing. For this reason it may just be safer to sell the assets outright in a partial liquidation.

5. Consider Company Administration to Facilitate a Recovery and Prevent Creditor Legal Actions

If creditors are already threatening legal actions and the above options are unable to increase your cash flow in time to satisfy their demands, then the best course of action might be to initiate company administration voluntarily. During this process you would appoint a licensed insolvency practitioner to act as the administrator (temporary chief executive officer) of your company, operating with the goal of facilitating a recovery when possible, or mitigating the effects of winding up if a recovery is not feasible. Once an administration order is granted you would be protected from any legal actions being taken by creditors and any interest charges would be frozen, so your company would have the opportunity to improve cash flow without facing the threat of bankruptcy or compulsory liquidation.

Keith Tully is a business recovery specialist with Real Business Rescue, a firm of insolvency practitioners dedicated to helping struggling companies across the UK. Image courtesy Alan Cleaver

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