How a business can improve cash flow and avoid disaster

  • 22 Oct 2020

Getting paid on time is a perennial issue for small firms, and the Covid-19 pandemic has made the problem even worse. But there are ways businesses can improve their cash situation, as Rob Gray reports.

The economic fallout of lockdown meant many small businesses had little option but to take out loans simply to stay afloat.

In July, the Government’s economic development bank – the British Business Bank – announced it had made £45 billion available in loans to support the cash flow of smaller businesses, including over a million ‘Bounce Back’ loans totalling £31 billion. There was also more than £11 billion in lending under the Coronavirus Business Interruption Loan Scheme (CBILS).


The coronavirus pandemic has exacerbated cash flow problems for a great many small businesses. According to Late Again, an FSB report published in June 2020, 62 per cent of SMEs have experienced either an increase in late payments and/or had payments frozen completely as a result of Covid-19, while one in 10 were hit by customers lengthening their payment terms.

As the report notes ominously, “unless we can successfully tackle the scourge of late payments and, more generally, poor payment practice, many small businesses will be forced to close their doors for good and will be unable to play their part in spearheading the UK’s economic recovery”.

In addition to a series of recommendations on rooting out 
poor payment practices, Late Again contains a ‘Leading the Way’ section that highlights some big businesses and organisations – Taylor Wimpey, Vodafone, Capita, Morrisons and HS2/Network Rail – which have taken steps to speed up payments to their suppliers. There is also praise for the work of both the Office of the Small Business Commissioner and the Public Procurement Review Service in pushing for prompt payment. 


Legislation makes it clear that larger firms will be under scrutiny if they persist in paying late but, as Finpoint CEO Guy Bridge concedes, Covid-19 has put a spanner in the works. Finpoint runs FSB Funding Platform, a one-stop shop for business finance available to FSB members. “If things don’t pick up, a lot of businesses will need ongoing support,” he says. “But I remain positive as many Bounce Back loans will have been taken up by sound businesses as they make good economic sense.” By this, he means competitively priced debt.

Action needed

If you run out of cash, your business will fail. Moreover, you may be accused of wrongful trading if you don’t have the resources to pay your bills as they fall due. So what can businesses do to stay solvent? 

“Ensure your cash management techniques are optimal,” says Dr Keith Arundale, Senior Visiting Fellow at Henley Business School. “How good have your previous forecasts been? Have you been overly optimistic, or maybe too pessimistic, in their preparation? Are the assumptions made in arriving at the forecasts reasonable, realistic and capable of verification? Remember, it’s far easier to forecast your costs than your revenues.” 


In the current pandemic, unless you’re in a highly sought-after sector, trying to forecast sales more than a few weeks in advance, let alone one or two years, is pretty much impossible. Dr Arundale advises focusing on your core business while taking advantage of 
any opportunities to pivot or expand in the current crisis – and preparing worst-case scenarios and cash requirements plans on that basis. If you have a trusted independent advisor, ask them to review your cash forecasting and cash management procedures. 

Justin McGorman, owner of business performance firm Reveal Business, recommends ensuring your data is clean and accurate. “This will provide insights to help you make better decisions that will conserve cash,” he points out. He also urges SMEs to stop any “maverick spending” and ensure sales and purchasing are 100 per cent aligned and working together with regard to forecasting and ordering.

Keith Marshall, a partner at accountancy firm Mazars, adds that improving your own housekeeping in areas such as stock reduction, faster billing, advance payments from customers and better credit control can have a big impact.

“If you’re carrying two months’ worth of stock and your customers take two months to settle invoices, then the business must fund four months of working capital,” he says. “By analysing your processes from the moment you receive an order through to the moment you receive the cash, you will potentially be able to identify areas which can be streamlined. 

“If your customers are taking 60 days to pay then you need to spend time on this, ensuring they learn new habits and start paying in, say, 40 days,” he adds. “If you can save 20 days on your debtors and the same again on your stock, then you will be reducing your stock and debtors cumulatively by 33 per cent. For a company with stock of £600,000 and debtors of £750,000, the amount reduced will be £450,000 and that amount will land up in your bank account, which could be a big part of your solution.”


External help 

If external funding is necessary, this can come in many forms – often involving asset-based lending, where business assets are put up as security for the term of the loan. Your bank may also consider offering an overdraft facility, although this may come with a personal guarantee which will expose you personally and could mean offering personal assets as collateral. 

Banks also provide invoice discounting: lending on the back of your debtor book. Mr Marshall says that, while this is a good method of financing that provides flexibility and a lending line that expands as business grows, “it is generally more expensive than term loans or overdrafts and carries a heavier administrative burden”. You might ask friendly customers to pay in advance, although tread with care as few may be able to do so in the current climate. 

If needed, there are other ways to free up cash, potentially disposing of equipment, vehicles or premises that are no longer needed.

“By all means sell capital assets that are surplus to requirements, bearing in mind that you are unlikely to recover full market, nor even book value, especially in a quick sale,” says Dr Arundale.

“But beware of disposing of assets that are, or may be, needed for the future growth of the business. You could consider sale and leaseback of property, leasing or hiring equipment rather than outright purchase or, for longer-term capital, some form of equity finance.” 

If your business has good growth prospects, even in the pandemic or indeed as a result of it, equity crowdfunding, business angel finance or venture capital could be considered. Here, of course, you would have to give up a share of your equity ownership.


Cash is king, so don’t leave its management to someone else, like your accountant or bookkeeper. Dr Arundale was once involved with an organisation that had to suspend a board meeting in order to stop the scheduled payments ledger run – or it would have become insolvent. A cautionary tale indeed.

Head above water 

JustDucks, owned by husband and wife Richard and Debbie Wolstenholme, is a leading supplier of plastic, PVC and rubber ducks. The company has four employees and operates mainly in the B2B market, supplying branded ducks to corporate clients and offering a bespoke ‘bill’d-a-duck’ service.

“People come to us with a mood board of what they’d like to create by way of a duck, such as ducks that are like Spitfire planes or the Golden Gate Bridge,” explains Mr Wolstenholme.


“A lot of our work is hospitality-related, for businesses such as hotels, so when lockdown happened it was like somebody had turned off the tap.”

When the crisis hit, Mr Wolstenholme furloughed his staff. Even so, to keep the business going he needed access to cash. Initially he sought funding from a high street bank with which he’d had a relationship for 20 years.

“After a complete lack of contact I eventually got an email saying unfortunately the application didn’t meet the criteria as agreed with the Government. I asked for a copy of the criteria and was told I couldn’t have it.” 

He was able to secure vital funding through the FSB Funding Platform, operated by Finpoint. Within a couple of days, his application for CBILS funding was approved and he secured £117,000 from lender Funding Circle.

The money has been used to keep the business going. There were orders in production at factories in China but he could not get hold of furloughed clients to find out if they still wanted them. The Chinese factories wouldn’t store the products so they were shipped to the UK in July. Mr Wolstenholme was able to contact some clients who were still happy to take the product despite the delay to their orders, as their events had been delayed too.

Mr Wolstenholme hopes his decision to take out a loan will be vindicated, but the situation remains worrying. “In effect, we have to start again,” he says.


“I will have to trawl through our database to get the business resurrected in a fairly short time. Like many small businesses, one of the biggest challenges for me is to come up with a plan that starts to bring some business in, so we can retain the staff who’ve been with us for 12 years.”  


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