Cash is KING

Cash is King for Businesses in Distress
CASH is the most important thing to a business in distress. Some key activities to create a strong cash culture.
Following the reaction to the recent interest rate increases by the Bank of England to levels not seen since 2008 you could be forgiven for thinking that the UK really is in store for a ‘storm of insolvencies’. It is true to say that many companies are just about surviving, following energy price increases, rapid inflation and supply chain problems. Debt funding is now more expensive and with debt and equity funding being harder to raise, working capital – cash – is the cheapest form of liquidity. In other words, cash is still king when it comes to the survival of a business. This article explains why and looks at some key actions that companies should take to build-in a cash culture in order to improve their cash flow and their future prospects.
Cash and Cash flow. Isn’t it Obvious that they are Important?
Yes, it is pretty basic and obvious really, but that doesn’t mean to say it isn’t true and also crucial to success. It’s also true that many businesses are not all that good at managing their cash and cash flow.
All accountants and insolvency practitioners will tell you that if a business doesn’t already run one, then a cash flow forecast must be prepared. There are many advantages a cash flow forecast brings, but the key ones are: control and prediction.
This is because when managers of a business really buy into producing a cash flow forecast, they start to understand how important good credit control is and where potential pinch points are in the business’s working capital.  Once a manager has accurate cash flow information, then they are in a position where they can consider taking the right action to overcome a problem, either by reducing costs or negotiating delayed payments to suppliers/creditors in the most effective manner.
In other words, if you understand your business’s pinch points you can talk to suppliers or other key creditors (the bank or HMRC, for example) ahead of time and with an understanding of where the business is and where it will be over the coming months. This will impress them, and, in our experience make it easier to negotiate agreed time scales if the business is going through a period of distress and needs a breathing space.
A cash flow forecast gives a business discipline because it makes a manager consider profitability on every payment because cash flow is in essence the business’ profit and loss account in terms of cash. This is just as true in the good times as it is in the bad times. And a cash flow forecast can help a business predict a bad time more quickly than otherwise, and work with its advisors, including insolvency practitioners to turn things around.
What Sort of Cash Flow Forecast is Needed?
The gold standard of cash flow forecasts is a rolling 13 week fully integrated cash flow:
Why rolling? It stays current and becomes historic, so you begin to predict the future, record the present and understand the past.
Why 13 weeks? It’s a quarter of a year.
Fully integrated? The cash flow links to the profit and loss account (as it must) and the business’ balance sheet as it should.
Can a Cash Flow Forecast Save a Business in Distress?
Businesses become insolvent for many reasons, and there are times when not a lot can be done if the reason is because of some sort of unpredictable external shock or rapid change in tastes/demand.
However, we also see a lot of businesses become insolvent due to a lack of information about the business and therefore lack of control. So even if there are many distressed businesses around, it’s a fair bet that a good proportion of them could go a long way to improving their future outlook by focusing on cash flow.
That doesn’t mean that all you need to do is have a cash flow forecast: it’s what you do with it that counts, and that can be tough. Generally speaking, we recommend that the following are considered and taken into account to embed a cash flow culture into a company:

  • Take specialist professional advice from an accountant or an insolvency practitioner
  • Make a plan and ensure cash becomes the business of everyone in the company
  • Nothing is sacred or not on the table
  • Produce the numbers you need (cash flow)
  • Control all spending and introduce effective cash reporting
  • Effective management of banking and other financing facilities
  • Ensure all collections of money owed are made as per contractual terms
  • Understand and share your minimum cash thresholds with all departments
  • Make decisions based on facts and information not emotion
  • Talk to your key creditors early and get their support if there is a problem
  • Don’t give away or sell assets off cheaply
  • Treat all creditors equally especially if they are family

Talk to our Insolvency Practitioners for Help and Advice
Insolvency practitioners are not just here for the times when liquidation is the only option. Very often we play a big role in helping businesses in distress take the action needed to help turn things around. Cash flow forecasting is just one of those tools. Contact us or call us on 01202 923009 for a FREE initial consultation with one of our team, at any of our offices.

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