My company is struggling - what are my options to improve cash flow?
Without sufficient cash, your business will fail. If your access to additional investment is limited, alternative options to save your business must be sought quickly.
The old saying, revenue is vanity, profit is sanity and cash is king has never been truer than when businesses are fighting for survival during and after a recession.
Statistics are now showing a return to economic growth. However, the reality for many companies is that they will continue to face depressed demand and a reduction in sales prices while battling with extended payment terms and bed debts.
In this environment, a full order book will be irrelevant if the business runs out of cash.
Cash through borrowing or refinancing often not available
The most obvious way to increase the availability of cash in a business is to consider borrowing or refinancing.
Asset refinancing schemes are available. However, these only apply if the business owns valuable assets which can be put up as security against a loan.
Given the difficulties of raising additional or new cash, companies must consider alternative methods to preserve the cash they have.
Restructuring debts to release cash
If a company is at risk of failure, cash can be preserved through a radical restructuring of the company's debts therefore reducing the monthly payments that it is required to make. One method of achieving this is a company voluntary arrangement (CVA).
A CVA enables a company's debt payments to be reduced ensuring cash is freed up to allow the ongoing trading of the business.
The arrangement will normally result in debt being written off allowing the company to trade into the future.
An alternative to a CVA is pre pack administration (also known as phoenixing). A pre pack allows a new company to purchase the assets of the old and start to trade without the burden of any legacy debt.
A pre pack can give a company the best chance of survival where debt is pushing it towards failure.
Business Recovery solutions are simply passing the problem around?
The argument against solutions such as CVA and pre pack administration is that creditors will suffer as a result of their debts not being paid.
This is true, however, it must be considered in the light of the alternative - the total failure of a struggling business. The closure of the struggling company would almost certainly result in unsecured creditors receiving no return, cause staff to be made redundant and give no opportunity for trade in the future.
A CVA or pre pack administration at least offers some return and the opportunity for the business to remain trading.
Ensuring that enough cash is available to maintain their business is likely to be the number one priority for many companies in 2010 and 2011. Those that do it well will survive. Those that do not are likely to fall.
As such identifying problems and implement solutions which may require a radical restructuring of debt must be a priority.
If your business is in financial difficulty why not talk to us about solutions, more info at
http://coopermatthews.com/phoenixing.html
http://coopermatthews.com/company-voluntary-arrangement.html
Derek Cooper is Managing Director of Cooper Matthews Limited and a member of the Turnaround Management Association UK.
Cooper Matthews specialise in Business Recovery Services Advice providing straight forward insolvency advice for businesses in difficulty and business owners with personal financial problems. They have significant experience in working with small to medium sized businesses, working with Directors, Sole Traders and Self Employed.
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