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Difficulties over cash-flow

10 August 2006
Difficulties over cash-flow

Don't ignore calls from the bank manager when cash-flow problems arise, Chris Lane, partner at chartered accountants Kingston Smith, advises

The problem
Thomas has been running his small hotel in Nottingham for nearly a year now, but already he is running into difficulties with his bank. The problem has come to a head and he is ignoring calls from his bank manager. Thomas knows that he must urgently sort out his cash-flow problems to prevent his business going under, but he doesn't know where to start.

Expert advice
As every entrepreneur knows, cash is the lifeblood of any business, and it's therefore vital to put the management of cash near the top of your priorities.

Whether or not your business is in profit, you can't leave anything to chance regarding managing your cash-flow. You need to know that you have sufficient cash to meet the requirements of your business and have an early-warning system to let you know when a problem is approaching.

Putting your head in the sand and ignoring calls from your bank manager is not a good idea. You're not going to solve anything by ignoring the issue, and it could possibly make things worse, as your bank manager might have to make decisions without your input which you won't be able to change.

Generally, bank managers don't like surprises, and they're more likely to help you with a temporary problem when you've warned them well in advance. This shows them that you're on top of your business finances and are thinking ahead.

You need to speak to your bank manager urgently in order to resolve the current crisis. But before you do, make sure you know what has caused the current problem, and also look critically at whether the problem can be addressed and resolved. For example, you might have had some recent unexpected expenditure that couldn't be avoided which has put a strain on your normal cash-flow.

You might not have matched the correct funding to the type of purchases made. For example, if you're acquiring a new coffee machine which has a life span of up to five years, using your overdraft is not ideal. It would be much better to match the borrowing over the five-year period - ie, the life of the asset. It's important to ensure that any expenditure represents good value for money.

Alternatively, there could be a bigger, more fundamental problem in that your business is not trading profitably. If this is the case, you'll need to look critically with your financial advisers and make some new projections to make sure the business is viable.

As you've been trading for a year now, you'll have some experience of the trading this time last year and therefore an expectation of future bookings or sales. The projection process will involve looking at all the costs you incur and cutting everything wherever possible.

Check list

  • Speak to your bank manager so you can find out what his issues are.
  • Prepare an analysis of where your business is at the moment - ie, management accounts and the reasons for the current problem
  • Prepare a plan which addresses the cash-flow issues you identify.
  • Discuss with your financial advisers the options available to you in terms of refinancing the business.

Beware!
Don't sit on your hands and do nothing, as this could make things worse. Act now and take control of the problem.

Contact

Chris Lane
Partner, Kingston Smith
020 7566 4000
clane@kingstonsmith.co.uk

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