Navigating a Cash Flow Crisis
The UK is no longer in recession according to statistics from the ONS, who reported in May that the economy grew by 0.6% in the first three months of 2024. That is undoubtedly good news. It’s the fastest the economy has grown for two years, but it’s still less than half of the 1.4% growth we saw in 2018 (which then was the lowest rate in six years). The cost of living crisis is still very much being felt and that inevitably puts pressure on business cash flow. In this blog we share our advice on how to navigate a cash flow crisis.
The first thing to get clear on is how much your cash flow shortfall is and how long you’ve got until it materialises. This might sound obvious but, if you’re looking at being thousands of pounds short next week, panic and confusion can set in. Once you know what you’re dealing with, you can then start looking at your options.
who owes you money?
You need to bring some more money into your business and one of the first places you should look is customers who owe you money. This won’t be relevant for all businesses (for example if your customers pay on purchase) but for lots it will. If you use an accounting software, such as Xero, it’s easy to generate a report showing your “Aged Receivables” - in other words invoices that customers haven’t paid. Pick up the phone, give people a call and ask them to make payment. Start with the largest amounts and anyone you know is most likely to pay. If checking your aged receivables and following up on unpaid invoices isn’t part of your standard business practice, make sure you start today!
what money do you owe?
We need to treat our suppliers fairly in business and that includes honouring their payment terms. In a cash flow crisis that just might not be possible, but we should still do the right thing. That means letting people know that we won’t be able to pay now and coming to an agreement about when you can. That can feel really difficult to do, but if we’ve built strong relationships with our key suppliers, it can make all the difference when times get tough.
By this point you may have resolved your issue, but if there is still a shortfall you will need to decide what gets paid and what doesn’t. If you have staff, the chances are you can’t delay paying their wages. But there may be other amounts which you can pay late, even if that comes at a cost. Perhaps a credit card bill, or even a tax payment. HMRC has a Time to Pay scheme that allows you to put a payment plan in place if you have missed a tax deadline or know you will not be able to pay a tax bill on time - and can help minimise penalties and interest. More details can be found here.
bridging the gap
As an alternative to paying late and incurring fees, penalties or interest you may want to access finance to bridge the gap. This blog is not going to explore the options in detail, and of course some of the options still come with a cost such as interest, but broadly they are:
Borrowing money from friends and family
Loaning money to the business from personal savings
Bank finance in the form of credit card or overdraft facilities (including increasing the limit on any existing facilities)
Bank finance in the form of a loan - personal or business
We know these options won’t be available to everyone, and even if they are, the time frames for putting them in place may be too long to make them a viable solution. Don’t go it alone - find someone you trust to talk it through with.
prevention is better than cure
There is a way to navigate through a cash flow crisis and come out the other side. But it’s important to reflect on how you got there and what can be different going forward. There are two things to say here. Firstly, a budget and cashflow forecast are a really important tool for your business and a way for you to see if the problem could reappear shortly down the line. Short term cash flow problems do happen in business, but if you know it is coming, you can plan for and manage it. Secondly, you need to consider whether the cash flow problem was a result of a profitability issue in the business. For the business to be sustainable you need a plan of how you will bring it back into profit, and a budget is the best way we know to do that.
