Managing a business when economic conditions are tough
Keep your cashflow healthy
Cashflow is the balance of money entering and leaving a business. At all times you need to know how much money your business has in the bank, how much it owes and how much it is owed. Regularly updating your financial records enables you to do this.
Many businesses overcome short-term cashflow difficulties. Often these problems can be anticipated, which means solutions can be found before the problem is urgent.
The importance of cashflow forecasts
Forecasts showing likely sales, profit and loss, enable you to identify when additional funds might be required. Then you have time to make necessary provisions, for example, by arranging a bank loan or overdraft extension to get you through periods of difficulty.
Practical steps to maintain healthy cashflow include: reducing stock, minimising costs, maximising sales volume and margins, avoiding overtrading (ie taking on work you cannot fulfil to price), recovering debt through invoice discounting and factoring, renegotiating credit arrangements and selling off assets.
Practical steps to control credit
Effective credit control measures include checking new customers before granting credit and re-checking significant customers regularly (their circumstances can change). You could provide incentives for early payment, while all customers should know you charge interest on overdue payments. Chase all outstanding sums as soon as they become payable.
Debt factoring involves selling your outstanding invoices to a third party who (for a percentage) processes them and advances you money against sums you are owed. Invoice discounting is an alternative way of drawing money against your invoices. However, your business retains control over administration of your sales ledger.
Read our guide to debt factoring and invoice discounting: the basics.
When debts become seriously overdue and all other efforts fail, you might have to take legal advice.
Subjects covered in this guide