5 Reasons and 5 Solutions for cash flow planning in businesses

Keeping an eye on cash flow is always essential for any business. A lack of available cash is the number one reason why businesses fail in the UK, even though many of them are profitable. Therefore, we explore five potential reasons for requiring extra cash this Christmas, along with five potential solutions for you.

Remember, planning is key to keeping on top of your cash flow. Identifying cash outlays early will mean you can get funding in place, so you don’t have to draw down on reserves, need to arrange financing, or in the worst case, manage a shortage of cash. This will also give you a good understanding of how much extra cash you need and how long you need it for. Consider this: would you rather lend to someone that asks you for cash when they need it, or someone that asks you ahead of time and can show you how they plan to repay you?

7th December 2021

5 potential pressure points on cash reserves to be aware of

1) Corporation Tax – if you have a March year end then your Corporation Tax charge will be due on 31 December 2021. This can be a large sum of money if you were profitable leading up to March 2021. Depending on the industry, some businesses thrived through the pandemic leading to higher profits and thus higher tax bills. Additionally, government grants received in 2020 are treated as business income which could have inflated your profits, again leading to a larger tax liability.

2) VAT liabilities – if you are a seasonal business that benefits from boosted activity in the Christmas period, it is likely that you will need to report higher than normal sales on your VAT return. This is likely to lead to an increased VAT liability which could be due for payment in early 2022 when cash may be harder to come by.

3) Customer payment days – although sales may be going well, you should consider when you are likely to receive the money into your account. If you mostly work with other businesses, customers can have 30-60 day payment terms. In the meantime, you will need to pay suppliers for stock used in production. This timing difference can put pressure on cash reserves at this time of the year.

4) Increased drawings – Christmas is a demanding time of year for cash flow at both a business and personal level. You may need to increase your drawings from the business to pay for gifts, entertainment or even to settle your personal tax liability which will be due on 31 January 2022. This coupled with a reduction in output caused by staff and bank holidays can have a significant impact on cash reserves. Make sure you include this in your cashflow forecast.

5) Expansion – as you tick over to the new year and the excitement of Christmas dies down, many of you will be thinking about how to expand your business in 2022. This could require more machinery, new premises, more staff, more product lines, increased advertising, increased stock reserves and much more. Each of these requires upfront investment which will need to be funded from cash reserves or by arranging finance.

So, now that you have considered these and have identified a need for more cash, here are 5 potential solutions:

1) Cash flow forecast – firstly, there isn’t much point going to the bank if you don’t know how much money you need to borrow. Therefore, create a cash flow forecast for the next 90 days as a minimum. This will give you a clear indication of whether you are likely to need finance, and how much you will need to borrow to see you through this period.

2) Invoice financing – did you know that you can essentially sell your customer invoices to a bank to free up funds for trading? If you have a lot of outstanding invoices from customers, this can be a great option for your business. In addition, the facility grows as you do, since more sales equals more invoices to fund against.

3) Financing against stock – some providers will give you access to funding based on the value of the stock you hold. This is very similar to invoices financing and can be a great way to release some cash for use in the business.

4) Hire purchase / lease agreements – if you are looking to buy new machinery in 2022, consider buying the asset on finance. This will help spread cash payments whilst also giving you an additional interest deduction from your profits for Corporation Tax

5) Recovery Loan – the Recovery Loan Scheme is designed to help business that have been adversely affected by the pandemic and is a follow on to the CBILS and Bounce Back Loan Schemes. To be eligible for this loan you must be trading in the UK, be able to show you have been adversely affected by the pandemic and the business would be viable had it not been for the outbreak. Facilities of between £25k and £10m are available and any borrowing is 80% backed by the government (due to reduce in January to £2m and 70% backing). However, as with any loan, you are 100% liable for the debt.

These are just a few examples of the types of lending that are available to you. If you would like to know more about your options, then simply click on the link below and enter your company number to see what you could qualify for.

In conclusion, our number one tip to you would be to plan. By knowing exactly what your finance needs are, you can arrange funding before you need it which will make the whole process more successful and less stressful.

To check what funding options are available to you, simply click on this link and enter your company number.

Old Mill advise on all areas of cash flow management, contact us to start a conversation or alternatively click here…