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Improving cash flow to turnaround your company
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How can I turnaround my limited company when cash flow is poor?
Poor cash flow is a key cause of insolvency for many limited companies. Understanding what’s causing the negative cash position is crucial if you’re to turnaround your company’s decline, and steer it back to a place of profitability.
There are two key tests for determining a company's solvency (or insolvency). These are:
- Balance sheet test - If a company's liabilities are greater than is assets then the company is said to be balance sheet insolvent
- Cash flow test - If a company is unable to pay its bills and other overheads as and when they fall due, the company is said to be cash flow insolvent
Once a company is insolvent, whether this is on a cash flow or balance sheet basis, swift guidance from a licensed insolvency practitioner should be sought. They will be able to take an objective view of your company and help to pinpoint the cause of the company's cash flow problems, before formulating a plan to turnaround the business and get it back on track if this is a viable solution.
If your company is experiencing cash flow problems, but it is not yet insolvent, there are some things you can do in order to facilitate a turnaround of your company and steer it back towards solvency.
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Cash flow forecasts highlight your company’s cash needs over a number of months which can identify any potential shortfalls. This knowledge gives you the chance to secure additional sources of finance ahead of time, rather than having to take emergency action when the company can’t meet its liabilities.
Increasing the efficiency of your credit control procedures can quickly improve the company’s cash flow position - by invoicing throughout the month, for example, and consistently chasing late payments, can help to stabilise an uncertain cash flow position.
Is your company insolvent?
If your company is insolvent you have a number of legal responsibilities that you must adhere to. Taking steps to protect creditors from further losses by contacting a licensed insolvency practitioner can help ensure you adhere to these duties.
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When used in conjunction with other steps, a cost-cutting exercise can be the foundation for longer-term business growth and a trigger for a turnaround of a company's financial position. Cutting costs where possible can streamline the business and immediately improve the availability of working capital and cash flow.
Extending the company’s by looking at other markets you can break into can help futureproof the business while also proving a much-needed injection of revenue to improve cash flow in the short-term.
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You may be able to reduce your monthly debt repayments through informal negotiations with your creditors, allowing some breathing space for the company to turnaround its cash flow position. Although this doesn’t automatically stop any additional interest and charges being added to the debt, your creditors may be willing to consider giving you some flexibility with repayment if you’ve been a reliable payer in the past.
Invoice finance is a flexible form of funding which can provide an element of certainty and stability to a company's cash flow position. By selling outstanding - and upcoming - customer invoices to an invoice factoring company, you can immediately release the cash tied up in them. This can help mitigate the challenges that come with late payers, giving you a reliable stream of income going forward.
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You may be able to negotiate for more time to pay the company’s tax arrears by way of a Time to Pay arrangement. While not a turnaround solution in itself, spreading the amount you have to pay could immediately free up cash flow.
If your company has already become insolvent, but is considered viable in the long-term, a Company Voluntary Arrangement (CVA) can help turn around your company allowing you to trade your way out of difficulty. A CVA is a formal insolvency solution that requires the input of a licensed insolvency practitioner to negotiate a new monthly repayment plan with your creditors.
If your company’s cash flow is poor and you need professional assistance to turn around your business, our licensed insolvency practitioners will provide specialist advice.
Further Reading on How can I turnaround my limited company when cash flow is poor?
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