By Lauren Auburn
BRI Business Recovery & Insolvency
THE two common insolvency tests are the balance sheet test and the cashflow test. A business is considered insolvent if either, not both, of those two tests are met. However, a business does not necessarily fail if it is only balance sheet insolvent but it will inevitably fail if it runs out of cash. Failing to monitor and manage your cashflow can put your business at serious risk.
There are a number of different factors that can affect cashflow; reduction in sales, increased costs, late payments from customers or even suffering a single bad debt. If you do start to notice any changes in your business that you know will have a negative impact on cashflow, revise your forecasts accordingly and continue to monitor carefully.
Some other tips to keep on top of your cashflow are:
Agree clear payment terms
Establishing clear payment terms with your customers from the outset is important. Once you have agreed payment terms, stick to them.
Invoice regularly
Get in the habit of invoicing customers at the earliest opportunity, ideally as soon as the work is completed.
If payment is then not received in accordance with your payment terms, chase for payment. Keeping on top of debt collection is important for maintaining positive cashflow.
Avoid overtrading
As difficult as it may be, be prepared to say no to new work if you don’t have the resources.
Overtrading can put a serious strain on cashflow and has, in some cases we have dealt with, been the sole reason for the failure.
Monitor sales/income
If your sales/income starts to decline, consider what your contingency plan might be and how quickly you can adapt and make changes if things do not improve.
All of the above points may seem like common sense. However, you would be surprised at how many business owners we meet that do not monitor the cashflow of their business. Cash is king and without it a business will fail.
If your business is experiencing cashflow difficulties, contact BRI Business Recovery and Insolvency on 01604 754352 for advice. All initial meetings with clients are completely confidential and at no cost.
