Most businesses have found themselves in a position where cash is tight and this can lead to difficulty paying suppliers’ invoices when they are due.
In general, this isn’t a problem if it only happens for a very short period and only infrequently. In these cases, the directors need to have a good look at their cash flow forecasting but apart from that, there shouldn’t be any lasting issues.
Where things change is where the cashflow issue becomes a regular occurrence or lasts for a while. In this case, a more extensive action is needed.
The starting point is to get some good quality help with accounting. It’s always useful to get a second pair of eyes to look over a cash flow and even if you have in-house accounts staff what you are looking for maybe a higher level of skills that you can task with specifically looking at and finding the causes of your cash flow issues.
Lack of cash can be caused by a number of things; the most serious of which is that you have a loss-making company and not enough capital to cover those losses.
Cash flow issues can also be caused by a structural issue within the business. For example, a building company that has customers that retain a percentage of the invoices as retentions may well show a healthy profit but might see less cash than they were expecting.
Understanding the difference between cash and profit is an important concept for business owners and is particularly relevant to the above situation.
Once the state of play has been analysed and you understand what is causing the issue then there are a number of steps you can take depending upon what the root cause actually is, but it is absolutely vital that you are realistic about the chances of the company surviving its problems. If you have any doubt then you need to contact an insolvency practitioner to talk over the options very early on to avoid any charges of trading while insolvent.
If the problem is systemic but curable then the best course of action is to approach the suppliers concerned and explain the situation. A good example would be where the company had some unexpected costs that have drained cash.
Again, it is important, to be honest. Please don’t fall into the trap of telling people what they want to hear or being over-optimistic. You’ll find that most suppliers can see the value in giving a customer time to pay as it means they get their money and retain a loyal customer for the future. It’s a rare occurrence indeed where a supplier gets upset or demands immediate payment.
Next, you’ll need to arrange some form of financing to ease the temporary cashflow while you sort out the problems. If you think that the shortage is going to be of a short-term nature then look towards short-term financing such as overdrafts etc. To finance longer-term projects and fixed assets then look to longer-term financing like loans with their associated lower monthly payments.
If your business is likely to be suffering cash flow problems for a significant period of time then you’ll need to look either at a much larger line of bank credit, an equity investor or indeed insolvency procedures.
If it looks unlikely that the business can trade effectively out of its difficulty in the short term then a CVA is a possibility. The final resort may well be a company liquidation
This is a formal process (and you’ll need an insolvency expert to help you through) that sets in place a formal agreement for the debtor to pay regular monthly payments to the creditors. It gives the suppliers some comfort that the debts will actually be paid but also allows the business concerned to pay off its debts on easier terms.
Many businesses have entered into a CVA and then come out the other side having paid their suppliers according to the terms and gone on to be very successful. AFC Bournemouth is good example having entered a CVA whilst in League 2 and then ended up as a well-run business in the Premier League.
The best thing about involving an insolvency practitioner early on is that they will be able to give you good advice as to your possible courses of action.
They will take a look at your situation, the level of debts, why it happened and will be able to form a realistic view as to whether the business can trade out of its problems. More importantly, they will be able to advise the directors of the likely results of an action and will give advice as to the best way to avoid any allegations of improper conduct.
If the business can’t trade out then the Insolvency expert will be able to suggest how to proceed and this may involve the CVA method as we have discussed or may involve administration or liquidation.
If your business is having difficulty paying its creditors then the overriding message needs to be to take advice early. If you leave it too long, don’t communicate and don’t make even small payments then your creditors will lose patience and may well take action themselves.
Once a creditor launches legal action is it almost impossible to get the relationship back which is particularly important for key suppliers.
It is also important to note that control then moves from the directors to the creditors and in many instances, the former business owners become mere onlookers as to what is happening to their old company.
If your business can’t pay its suppliers then get realistic, get advice and get help.