Cash Flow Problems – Temporary cash shortage 1/8

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In the first of a series of eight blogs, our banking experts will look at common cash flow problems that businesses encounter. In this blog, Alexei Garan, Head of Shaw & Co’s Debt Advisory team, discusses the most common type of cash flow problem – temporary cash shortages.

What causes temporary cash shortages?

Nearly all businesses experience cash flow problems at one time or another. And when they happen, you need to act quickly or risk them damaging your longer-term performance.

Temporary cash flow problems can happen for a variety of reasons, including your customers being unable to pay you due to insolvency, seasonal fluctuations in demand for your products or services, unexpected costs caused by plant and machinery breakages or increased input costs such as materials, labour or other overheads.

If you do not have adequate cash reserves to weather a short-term cash emergency, or have not planned how to run your business during such a period, you may struggle to maintain a healthy cash flow for the longer term.

A temporary cash flow issue may also indicate an underlying problem in your business that, if not resolved, could bring it to a shuddering halt. The good news is that cash shortages are often a temporary blip, with no detrimental impact on the long-term viability of your business. However, when you are faced with a cash shortage, you need to act fast and take control.

What are the key indicators?

The following financial indicators can help you monitor your cash flow, enabling you to spot warning signs  and prevent any long-term damage to your business:

  • Debtor book receipts versus expectations/invoice terms.
  • Items payable versus expectations/standard terms.
  • Weekly cash balances vs projections/headroom.

When faced with a temporary shortage of cash, these are the key steps that key stakeholders within your business should take:

Role of the MD/CEO

The MD/CEO needs to take control of the emerging situation by:

  • Fully understanding the issue by carrying out root cause analysis.
  • Making sure that the issue is a one-off by putting in place procedures to prevent it happening again.
  • Working closely with the FD on projecting and monitoring the weekly near-term cashflows.
  • Working with the FD and other business units on coordinating the remedial action plan. Instigating daily huddles and deploying a ‘plan, do & review’ process to fix the problem.

Role of the FD

The FD needs to take responsibility for identifying internal and external solutions to mitigate the short-term deficiency in cash flow by:

  • Monitoring cash balances and daily weekly projections to maximise visibility and flag problems early.
  • Identifying internal solutions which may include: selecting debtor-customers for an early pay discount offer; agreeing a monthly versus quarterly rent payments to alleviate pressure; considering reverse factoring solutions on payables to suppliers; and investigating potential delays to capex expenditure.
  • Identifying external solutions such as increasing the bank overdraft, raising a shareholder loan, considering sale-and-leaseback of company assets such as property or equipment, and exploring if the company insurance covers the specific shock.

Role of Ops/Sales

The Sales and operations teams need to support the MD and FD by:

  • Carrying out the remedial plan.
  • Pivoting to a near-term payment strategy to speed up cash flow receipts on current jobs or projects.
  • Identifying if automation or process redesign will enable resources to be deployed elsewhere to increase value.

Key points

The best solution normally reflects the nature of the problem. If the temporary cash shortages cannot be alleviated through faster revenue receipts or slower cash outflows, a temporary overdraft or short-term loan is often the most viable solution. Remember, if you can convince yourself that the problem is purely temporary, you should also be able to convince third parties.

I hope this blog has provided some useful tips on what may trigger a temporary cash shortage and how your teams should work together to mitigate any long term damage. To see how we recently helped Acacia Associates overcome a short-term cash flow problem, please read our case study here.

If your business is facing a similar cash flow situation, please do feel free to contact me, I’d be delighted to help.

Alexei Garan – Head of Debt Advisory, Shaw & Co

Alexei leads Shaw & Co’s Debt Advisory team and supports clients in a range of sectors including Energy & Renewables, Engineering, FMCG, Healthcare, Human Capital, Leisure, Manufacturing and TMT. Over the last 10 years, he has advised on over £2bn in restructured post crisis client portfolios and arranged over £400m in client funding. Alexei has also been called in as an expert witness in several post-financial crisis legal cases.