Solving Cash Flow Issues In a Limited Company

November 9, 2023 / Cashflow Problems

Managing cash flow is a primary concern for company directors. For small and large businesses, cash flow is what facilitates growth, allows for credit, and keeps a company’s doors open. In other words, cash flow is crucial to a company’s health and development.

Perhaps because of its importance, cash flow is one of the main areas which can cause real difficulties for a company. Cash flow disruptions are common, ranging from short-term issues without too much trouble to long-term potential disasters. Given the importance of cash flow, it is essential for any director to know how to identify and solve any cash flow issue as it arises.

In this article, Clarke Bell will discuss the cash flow of limited companies, the main issues they can expect to face, and what possible solutions you have at your disposal.

What is cash flow?

Cash flow refers to the movement of money in and out of your company. It highlights successful and unsuccessful areas of your company, giving you much-needed information on how things are going. Cash flow also gives you a solid idea of how much money your company has on hand at a glance. In other words, cash flow is a set of data that is vital to your company’s ability to maintain operations.

Why is cash flow so important?

The importance of cash flow cannot be overstated. A positive cash flow is an absolute requirement for a majority of the needs of a business, ranging from the payment of employees to taking on additional debt. Simply having an accurate set of financial data can work wonders for drafting feasible plans, even if those plans require pulling back on company spending for some time.

On the other hand, having a negative cash flow can be quite a problem. While it can cause a series of issues, the main one is a lack of flexibility. A cash-poor company will struggle to swiftly respond to financial problems owing to a lack of available cash for emergencies. This can cause an otherwise profitable company to quickly take on debt, further hampering cash flow. In the worst case, a lack of available cash can cause a company to enter a debt spiral, creating a serious issue and possibly even spelling the company’s end.

To avoid any unnecessary financial problems, it is always good to have a buffer of cash stored in company accounts. Cash is king, as they say.

Causes of cash flow issues

A great many different factors can cause cash flow issues. For the purposes of this article, we will focus on some of the more common cash flow issues.

Late invoice payments

One of the most common cash flow issues is late or partial invoice repayments. The extent of this issue will vary from company to company, but regardless of the goods sold or services provided, every company will deal with late payers eventually. While one or two late payments from time to time can be managed, having multiple clients regularly pay late can be a massive problem. This is especially true for companies that have high operating costs, such as construction or trade companies. Partial payments pose much the same issue as do payments via instalments. Both can place undue strain on a company’s cash flow, particularly for small companies that must normally walk a fine line for their first few years.

Fall in commercial activity

A fall in commercial activity can be a major cash flow issue. Such a decline can be caused by a drop in interest in a particular industry or due to events outside a director’s control. In either case, fewer customers normally means less income, which causes more problems for a company’s cash flow.

Rapid growth

Growth is the goal of many companies, but too much too fast can cause problems. While rapid growth does increase the amount of money coming in, it also increases the money that needs to go out. A growing business requires more stock, more employees, and expansion plans. All this greatly adds to expenses, which can be difficult to manage – especially as the costs often need to be paid before the incomes are received.

Overspending

Overspending is another very common cash flow issue. While it is certainly true that a company must spend money to grow, spending too much can have the opposite effect. Losing track of expenses is an easy way to put pressure on your company’s cash flow.

Low emergency cash reserves

Having a cash balance stored in company accounts is essential for a quick response during emergencies. What balance is sufficient will depend on your company and its needs, though an estimate can be reached by considering your company’s outgoings. Having enough cash to cover essential outgoings for a short time is a good idea. Similarly, having a cash reserve to draw from can be invaluable if unforeseen issues occur.

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Solutions to cash flow issues

Appropriate solutions for cash flow issues depend on the position of your company. Some companies will require small-scale solutions, while others will require more extreme methods. Below are some solutions to cash flow issues.

Invoice financing

Invoice financing could be a good solution if your company faces cash flow issues primarily due to repeated late payments. This alternative form of finance utilises a company’s unpaid invoices, using them as security for the loan. Depending on which invoice financing lender you use, you can expect to receive around 90% of the invoice’s value, minus some additional fees. Although you lose some cash in the long run, a quick and easy injection could be what your company needs to alleviate cash flow issues.

Cut costs

While certainly an obvious solution, lowering outgoings is vital in cases of an ailing cash flow. Most companies have some expenses they can live without, such as premium service subscriptions. Making cutbacks may cause some difficulty in the short term, but it can help keep a company trading for longer.

Revisit your business model

If your company is having trouble with its cash flow, taking a look at your business model is a must. Business model flaws are often the main problems when it comes to cash flow issues. For example, if you have structured your business model around receiving prompt payments, but it turns out that you are constantly suffering from late payments, then you need to change your business model.

By revisiting your business model, you can make it more resilient to future problems.

Additional credit or investors

Although perhaps not a first port of call, taking on additional credit or opening your company up to investment can help raise much-needed capital quickly. Existing investors may be willing to throw in additional cash if you’re honest about the situation and have a solid business model that just needs an extra push. However, using this method shouldn’t be done flippantly, as any extra money coming in needs to be used as part of a thorough plan.

What happens if solutions don’t work?

Sometimes, solutions to cash flow issues don’t work. If that is the case, and your company’s cash flow problems are too much to handle, you might want to consider insolvency procedures. Leaving the situation unaddressed may cause it to spiral. So, taking decisive action is a must.

Business rescue

Business rescue is a good place to start. Cash flow issues are a major problem to a company’s long-term success, but they can often be solved. Professional advisors will be able to give to possible solutions for your situation. A licensed insolvency practitioner, like Clarke Bell, can be invaluable to you. They can work with you and your accountant (if applicable) to help identify and implement the best option for you and your company.

Business rescue plans vary from company to company. Every company has its unique quirks, even if it suffers problems common to many companies. As such, what works for one may well not work for another. For example, some companies may benefit greatly from a simple tweak to their business model or a light restructure.

An insolvency practitioner can come in with a fresh set of eyes, analyse the company for its weak spots and areas of success, then suggest necessary changes. Once implemented, the company should be set on the path to recovery. However, other companies may have problems that run deeper, requiring a more in-depth solution. This could be something like company administration, or a Company Voluntary Arrangement (CVA) to renegotiate deals with creditors. In some cases, a company’s cash flow issues may be so great that they are essentially unsolvable, making insolvency almost inevitable. In such cases, liquidation may be the best solution.

Company liquidation as a solution to cash flow issues

Liquidation can be a viable solution to cash flow issues.

Creditors’ Voluntary Liquidation

Creditors’ Voluntary Liquidation (CVL) is a form of liquidation specifically designed for insolvent companies. This means that your company must have more debts than assets, or cannot pay its liabilities when due, to qualify. As a voluntary insolvency procedure, directors may appoint a licensed insolvency practitioner of their choosing to handle their company.

While in this position, the insolvency practitioner will assume control over the company, relieving directors of their operational duties. The liquidator will then dispose of assets for as high a value as possible, distributing the proceeds amongst creditors. Once all possible distributions have been made, the company will be wound up and removed from the Companies House register. If any debts remain after this point, they will be written off, barring those secured by personal guarantees.

Directors will also personally see some benefit, as using a CVL shows a willingness to act in the interests of creditors. This acts as a great defence against accusations of director misconduct.

For a more in-depth look at CVLs, read our complete guide to the process.

Compulsory liquidation

Compulsory liquidation is one to be avoided, where possible. Compulsory liquidation does pursue the same goal as a CVL, that being the closing of a company, but does so without the same benefits. It is intended for insolvent companies, though it does not allow directors to appoint an insolvency practitioner. Instead, the courts will appoint an Official Receiver to the case. The Official Receiver will function much like any other liquidator, selling off company assets and distributing the proceeds to creditors. At the end of the procedure, the company will be wound up and struck off from the Companies House register.

As compulsory liquidation was forced upon the directors, it gives the appearance (rightly or wrongly) that they were not interested in fulfilling the responsibilities they owed to their creditors. This can leave directors vulnerable to accusations of misconduct, leaving defence more difficult to conduct. Should directors be found responsible for the decline of the company, or guilty of a failure to act in creditor interests, then a series of penalties could apply. Penalties can include fines, disqualification, and director responsibility for debt.

Clarke Bell can help you

Cash flow issues are a common occurrence, with many companies facing them at one point or another. Although these problems can often be solved, some cash flow issues can be devastating for a company.

Clarke Bell can help you with your company’s cash flow problems. Since 1994, we have been helping directors to solve their company’s financial issues and helped them move on, with a fresh start.

We can do the same for you.

Contact us today for your free advice.