subject: Managing A Cash Crisis [print this page] The key steps to take to deal with a real cash crisis are firstly to get to grips with your exact cash position and this involves preparing a cash flow forecast. Then you will need to both improve the control of the cash you have as well as identifying opportunities to create or free up more cash.
Understanding your position
A cash flow definition is the forecasting of a business's real cash inflows and real cash outflows over a period; usually on a weekly basis for 13 weeks in a crisis, but sometimes on a daily basis in extreme cases.
Cash flow software is available but these can usually be prepared using a simple spreadsheet on which you set out in a logical structured way the expected timings of real cash:
- coming into the business from debtor receipts, loans raised or assets sold; and
- going out of the business by way of payments.
Together these will give you a net cash movement over the period which can be used to walk forward your expected cash position based on the assumptions you have made.
Controlling the cash you have and managing cash flow
You should then actively use your cash flow forecast to control the cash in your business by using it to make decisions on the timings of payments and what commitments you can make to creditors.
In preparing your forecast you should also be using it to examine your business. Can you identify for example where the cash is either leaking out or getting stuck? Is it particular branches, sites or parts of the business? If so, you should immediately target these areas for specific reviews and remedial action.
At the same time you should centralise and tighten up on your controls over purchasing and making payments by for example, increasing the level of authority required for purchasing or payments or cancel or restricting the use of credit/charge cards so that cash is not wasted or committed outside of your central cash management process.
A cash crisis can arise for a number of reasons from your business's sales shrinking on one hand, to them growing too fast, and the type of problem will tend to suggest the long term changes that you will need to make in your business.
But whatever the underlying reason, to survive a cash crisis in the short term, once you have taken the steps outlined above to control the cash you have, you must focus on some or all of the following key areas:
- Get in more cash or credit from elsewhere - what surplus assets could be sold, what loans can be raised?
- Reduce and/or control the cash going out - what you don't spend you get to keep, so what deals can you do with key suppliers or HM Revenue & Customs?
- Reduce the amount of cash you need in order to trade - don't think of stock and debtors as assets. Instead think of them as cash that has been frozen in place and which you need to get flowing again. If money tied up in high stock or debtor levels are part of the cause of your cash problems consider bringing in a lean process expert to help free this up.
Steps to consider
In the longer term you are also likely to need to improve both profits and management but in the short term can you for example:
- Sell or rent out surplus land and buildings, plant and machinery, or motor vehicles?
- Make assets surplus by sub-contacting manufacturing processes?
- Sell and lease back assets to provide cash, or use other asset based financing to borrow more than presently?
- Agree better payment terms with supportive creditors?
- Ask customers whether they would supply free issue materials?
- Seek injections of capital in cash or kind. Would a key supplier be willing to swap some of their debt for equity in the business?
- Improve debtor collection performance?
- Reduce raw material, work in progress or finished goods stock by introducing lean processes?
- Cancel discretionary or non essential expenditure such as payments of dividends.
- Negotiate scheduled payments of arrears with key creditors (an 'informal arrangement') or a time to pay agreement with HM Revenue & Customs on arrears of PAYE/NI or VAT (although a condition of this will always be that future sums due are all paid on the due dates).
Remember, if you do negotiate payment terms with the Crown or suppliers, don't make arrangements to pay that you cannot stick to.
The steps that will be appropriate will vary widely from business to business so this is by no means a full list and you should always keep in mind that you can also consider using one of the rescue procedures available under the Insolvency Act 1986.
Of course the information contained in an article like this can never be a full statement of the legal position as the relevant laws are complex and liable to change. This article can only therefore be a general guide as to the issues involved and as these can have serious implications you should always seek appropriate professional advice on your own particular circumstances before taking any action.
by: Mark Blayney
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