Business Recovery from covid-19 slow down

Businesses fail when they become insolvent, they cannot pay their debts as they fall due. This is also referred to as having a lack of working capital.

This is a dangerous position to be in as:

  • If a business is trading unprofitably, cash flow problems will emerge as a symptom of the lack of profitability and the business will be exposed to a downward spiral. If a business is profitable it can also have cash flow problems. The business may be having difficulty managing it’s debtors or may have a large contract with payment slots that do not match the cash flow requirements of the business. This is a dangerous scenario as the cash flow problems can cause the company to become unprofitable.
  • A lot of people do not realise that It is possible for profitable and unprofitable businesses to become insolvent.
  • Often the immediate reaction of the small businessperson when confronted with cash flow problems is to push for more sales for the business to trade out of the problem. This can increase the stock requirements of the business and the amount of debtors to be funded, making the problem worse.
  • The first thing to do when looking to solve cash flow problems is to review the profitability of the business, identify the breakeven point and the fixed and variable costs.
  • The second thing to do is to identify how the business can be reorganised to operate profitably with a lower costs structure. What costs can be removed to lower the breakeven point of the business without damaging the business.
  • Once this has been done you then know whether the business is profitable or unprofitable. A business can be unprofitable due to it having cash flow problems, so it is important to also review the cash flow problems of the business and what can be done to fix them.
  • The third thing to do is to work out what is causing the cash flow funding problems of the business. This is done by reviewing why the business has cash flow problems and drilling into the specific causes of the cash flow problem. A cash flow problem can occur for example from sales decreasing to cause the business to trade below its breakeven point or by debtors becoming slow to pay or the business not operating efficiently or the business unable to compete due to it using old technology.
  • It is important to determine the cause of the cash flow problem before looking to fix it. For example, borrowing monies from a bank or other external lender may only provide a temporary solution and ultimately could make the problem worse if the cause of the cash flow problem is not addressed. Borrowing money may only fund the cash flow shortfall till the borrowed monies are consumed by the cash flow problems.
  • The fourth thing to do, now we know what is causing the problem, is to create a plan for how the problem is to be fixed. This is not always easy as if, for example, the debtors have been given too much rope they may be difficult to bring back into line in a timely manner without damaging the business. Normally the solution is a number of things. The plan very often comes down to tightening the cash flow management within the business eg reducing average number of days for debtors to be collected, realising surplus assets in the business and injection of funds from shareholders. Very often it is necessary to reduce the size of the business to reduce the working capital requirements of the business and have a realistic chance of fixing the cash flow problems of the business.

Cash flow problems very often cause the business to go into a downward spiral, with goods being sold cheap for cash flow but causing the business to be unprofitable.
The fourth thing to do is to review the cash flow systems of the business for improvement. Are the terms of trade of the business being adhered to by customers? Do customers need to be monitored far closer for payment? Is the business carrying too much stock?

The best advice we can give in regard to cash flow problems is to be calm, methodical. Check if the business is profitable or can be made profitable. If the answer is no serious consideration should be given to shutting the business down. If the answer is yes, then address if the business cash flow can be fixed. If the cash flow problem cannot be fixed we recommend serious consideration be given to shutting the business down. If the business cash flow can be fixed, problem solved.

(Talk about payment arrangement with creditors)