For many businesses, cash flow is the number one problem right now. With a sudden (and in some cases, complete) drop in revenues from the lockdown, cash is tighter than ever. Not only are new sales coming to a halt, but existing bills aren’t always being paid.
Our analysis has shown that disruption from coronavirus means companies will have to write off £8.6bn in unpaid invoices in 2020. Firms that operate on thin margins are in danger of failing, with long-lasting knock-on effects throughout the economy. The Road Haulage Association, for example, has warned that many transport firms are “on the brink of collapse”, as they typically only operate with two to three weeks’ cash flow within their businesses.
We’re going to take a closer look at how to manage cash flow risk and improve your cash position during this uncertain time.
The first step is to make sure you are taking advantage of all of the entitlements owed to you.
The government is offering a range of grants for small businesses to help them through the crisis. These include cash grants of up to £25,000 for retail, hospitality and leisure businesses that have a rateable value below £51,000, and a further £10,000 for small businesses in receipt of Small Business Rates Relief or Rural Rates Relief. There’s also the Coronavirus Job Retention Scheme and Business Interruption Loans, which are interest-free for the first year.
The R&D tax relief scheme offers another way to access significant cash. It was set up by the government to encourage innovation by allowing businesses to reclaim some of the money they invest in R&D. The credit can be substantial and an immediate boost to cash flow, either as tax relief or in some cases a cash payout.
Despite this, only around 0.5% of eligible businesses take advantage of this benefit. Most firms don’t realise that the work they do constitutes R&D. Qualifying expenses must relate to your trade and be attempting to overcome a problem that isn’t easily solved by industry professionals. This somewhat broad definition means that more activities constitute R&D than you would think, and it’s something worth investigating within your business.
Next, make sure to maximise your working capital. You may look to tighten payment terms for clients and extend credit terms with suppliers. Consider holding less stock to keep cash in the business.
However, remember that we’re all in this together. Now is the time to talk to your clients and suppliers collaboratively to find the right approach that works for everyone.
The government has already announced that all businesses may be eligible to receive support for outstanding tax liabilities, and this can provide a short-term buffer to your working capital.
If you are due to pay a dividend in the coming months, consider reducing or cancelling it. Communicate to shareholders that this is part of a strategic plan to secure the long-term financial health of the business.
Assess whether any unnecessary costs can be reduced. This could include some of your overheads – for example, can you secure a rent or mortgage holiday, or a reduction for this period? Can you delay non-urgent costs such as IT upgrades? Other costs should naturally reduce during the lockdown, such as travel, cleaning, and office materials.
Finally, take a look at how you can increase your revenues – both now and in the future. Make sure to monitor your client base carefully to identify those that might be at risk of failure.
At the same time, look at identifying new customers to improve sales and future cash flow. Red Flag Alert’s wealth of data can help you to find the best target customers by enabling you to build highly targeted prospect lists.
Red Flag Alert goes the extra mile in evaluating risk for our customers and providing valuable data. We not only have the best algorithm to analyse and assess risk factors, but we also have experts collating, analysing, and digesting data to generate financial health ratings for all UK businesses.
Download a free copy of our playbook on emerging stronger and leaner from the coronavirus pandemic here.
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