ESSAYS

Essay on Options Open to a Small Business Facing a Cash Flow Crisis

ONLINE EXAMPLE OF ONE OF OUR CUSTOM ESSAYS

Many small businesses will face cash flow problems throughout their entire lifecycle but almost certainly within the first 2 years of trading. These cash flow problems can be attributed to many different causes some examples are a decline in trade, non or late payment of invoices, unexpected one-off charges for repairs and renewals, an increase in price of raw materials, increase in competition etc. Whilst the original business plan may have forecasted and accounted for some difficulties, the prediction of the future is not an exact science.

What can cause cash flow problems and what measures can be taken to ease the cash flow crisis on these occasions? "

Non or late payment of invoices - Creditors should be sent a regular statement showing the money owed. This should be done on a monthly basis or more frequently dependant on your trading terms i.e. payment due 28 days from invoice date. If an invoice has gone past its due date a letter should be sent immediately, this should be followed by a phone call(s). If the debt still has not been repaid a personal visit often works. If these methods are not successful there are legal channels that can be used. You can instruct a solicitor to draft you an official letter or instruct a debt collection agency to collect the debt on your behalf. Charges will be made for these services, a solicitor will charge a flat fee for the letter, and a debt collection agency will charge you a percentage of the debt.

If bad debtors are a continual problem factoring services can be used. This is where a company buys your debt (often for a high percentage upfront) the remainder of the debt (minus the finance houses fee) is then paid once they have collected the debt from the customer.

Care should be taken when allowing your customers credit. It is always worth remembering that the majority of suppliers to new small businesses will demand cash-on-delivery until you have established a successful working relationship. It is always worth the extra cost of sending for a companies credit file that wish to trade with you. A simpler system, which is free of charge, is to ask the company who wish to have credit to obtain references from other suppliers to them and also a banks reference. If the company have nothing to hide this is a very simple and swift procedure. "

Extend your credit facilities - overdraft, mortgage, or loan. Can you re-negotiate the terms of borrowing? Be this a longer repayment stage (say 7 years instead of 5) does your loan have a provision to take a repayment holiday? Have you accounts elsewhere if so can you switch lenders? It helps when you see your bank manager to have the exact reasons why your initial business plan is struggling and how you plan to repay the additional borrowing.

Vigorously target new contracts, get a written confirmation of the contract you have agreed and use this information to persuade the bank manager to increase your existing credit facilities.

Banks and other financial lenders seek to reduce perceived risk on money lent. If you can show them agreed contracts for future work this massively reduces the risk of the money they are lending to you. "

Share release - Could you sell a stake in the business. Options here could be a family member, friend, competitor or supplier. If your business has been successful and the cash flow problem is only temporary, many people will be willing to invest. The advantage here is that the money does not need to be repaid. The negative is you have taken onboard another partner, silent or otherwise, and they are now involved in any future profit share and the future shape of the business. "

Examine your fixed costs - If you lease the building do you need all the space you have leased. Does your contract permit you to sub-let? Sale of capital equipment - plant, computers, vehicles. If you own them it is possible to sell them immediately releasing valuable cash. If any of the items were essential to business then in the short term you can take the equipment back on a lease basis, this would release valuable cash. "

Examine staff costs - If you are a sole trader or partnership examine your own drawings first. Do you or your partners need to take this much monthly/weekly? Who are your other staff - do you need them all? Could you reduce the hours they work? When reducing staff it is important to remember to keep them informed of the decision making process. If this cash flow crisis is a short-term problem they may be willing to accept a reduction in wages or hours to help you through. Your staff may take a long-term view and consider that having to take a pay cut or reduction in hours in the short-term is better than losing the job completely. "

Injection of personal finances - Re-examine your original business plan, what has changed? If the business still has potential it is worth investing the savings you have. If you can only see limited potential then the best course of action may be to scale down or close the business. If the cash flow crisis is pointing to a much bigger problem then it is advisable to examine all alternatives, this also includes closure of the business. The harsh reality is that the vast majority of small businesses fail within 3 years. The most common reason that a business fails is poor cash flow management rather than poor profitability.

What is absolutely essential is to focus in on the causal factors of the cash flow problem. Can they be resolved? Is this just a temporary blip? This is a very demanding task, especially to a sole-trader or small partnership, as this is not just a job but also a way of life they have opted for. They will be tempted to look for failures within themselves (which could be a factor) but the simple truth is that their business must bear scrutiny and if close examination shows little room for improvement then the decision should be made to cease trading. If the causal factors are known and can be resolved then the cash flow problem can be used to benefit the future health and trading of the company. Periodically it is wise to return to the original business plan and examine where you are currently with where you expected to be when you commenced the venture. Have you strayed away from your core product/service, is your turnover more or less than predicted, have you expanded more quickly than predicted? Answering these questions really helps to focus back in on what was important at the very beginning.

When you have examined your business and realised the cash flow problem will not be permanent and the venture is viable then I would recommend the following steps.


Read other essays

All of our sample essays were written by students and then submitted to us to display and help others. Thanks to all the students who have submitted their work to us.