Identify potential cashflow problems

Identifying any potential cashflow problems before they occur can help you to prepare for them and prevent financial crises.

This guide outlines the benefits of keeping an eye on both your projected figures and market conditions in order to be ready to adapt and take action to avoid potential problems. It also stresses the importance of creating and maintaining good relationships with banks, other lenders, and your customers in order to manage your cashflow effectively.

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Keep business forecasts up to date

Keeping an accurate and up-to-date budget or business plan will help you manage your cashflow, by allowing you to:

• record actual figures
• compare actual figures with the budget or plan
• record any inconsistencies and investigate the reasons for them – eg a one-off, seasonal demands, changes in the economy or problems in your business that could be improved
• review whether the budget or plan should be updated

You should also consider completely new factors such as an unexpectedly large order or the arrival of a new competitor on the market, and whether these changes need to be incorporated into your business plan or budget. You might choose to:

• Keep the original budget – but measure and understand any variances in the actual figures against the original budget and new forecasts.
• Use rolling budget/forecasts – as each month’s actual information is finalised, update the budget to provide an additional month’s data. This means that you will always have a 12-month projection.

Whatever system you use, it is important to keep your eye on the forecasts and keep them up to date.

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How changing market conditions can affect your business

In order to identify and deal with any potential problems, you should always be aware of any outside developments that could affect your business, and, if necessary, be ready to respond and change your plans quickly.

You should always be aware of:

• Interest and exchange rates – these can have an influence on the general trading climate and are not just a matter of direct costs. For example, interest rates may affect certain industries more than others and at different times, and foreign exchange rates could affect how easy or profitable it is to do business with another country.
• Your competitors – both existing ones and new ones, and what their strengths and weaknesses are.
• New technologies and innovations that could change the market and increase or reduce the demand for your existing product or service.

All businesses experience changes in the general sales environment at some point. These changes could affect the entire economy – such as a recession or economic downturn – or they might only affect a specific industry or sector. It is important to be alert to possible changes and amend your forecasts and plans to compensate for them in order to avoid potential cashflow problems. See our guide on managing a business when economic conditions are tough.

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Working with banks and other lenders

You can benefit if you maintain good relationships with your bank and other lenders. They may be able to offer advice, or they may raise concerns that you need to address.

When looking for finance or reviewing your relationship with banks or other lenders, you should:

• Consider all the options available to you before accepting a loan, overdraft or other form of finance – see our guide on bank finance.
• Try and negotiate a satisfactory agreement at the outset. Most overdrafts are repayable on demand – this is rarely enforced, but that doesn’t mean it won’t happen.
• Try and build good personal relationships with the person responsible for your account with regular communication.
• Keep your bank or lender informed and tell them the bad as well as the good news. If you have a problem, explain what action you will take to solve it.
• Keep all your figures up to date and pass them to the bank – see the page in this guide on how to keep business forecasts up to date.
• Consider alternative sources of funding to suit your business needs.
• Consider using services to reduce the time between expenses and income – such as factoring, invoice discounting, leasing, or equipment hire purchase. See our guide on factoring and invoice discounting: the basics.

You can read about your rights in relation to loans and cards on the Financial Services Authority’s (FSA’s) Money Advice Service website- Opens in a new window.

You can also find information about the appeals process for when you have been refused funding on the Better Business Finance website- Opens in a new window.

Short term finance providers

When cash is tight or if your bank has refused a loan, there may be a temptation to look for a quick loan to tide the business over. There are many loan providers that will provide cash quickly, but you should always consider the risks fully. For more information, see our guide on non-bank finance.

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How to know when your customers are in trouble

If you only have a few customers, and one of them has money problems and can’t pay what they owe you, it can have a serious impact on your business. It is good practice to avoid relying on a small number of customers if possible, but it is also important to be vigilant and look out for signs that any of your existing or potential customers are in financial trouble.

There are several signs that a customer may be struggling financially – for example:

• a change for the worse in payment patterns
• frequent mistakes on cheques – these could be an indication that they are avoiding paying or buying time
• they are refusing to talk to you or are putting off payment for little or no reason
• smaller or less frequent orders than usual
• they unexpectedly or suddenly request an extension to their credit limit 
• if your customer is another business, you or your sales staff may see problem signs when visiting their premises – eg unsold stock

It can pay to keep your ear to the ground. Without indulging in gossip, it is worth talking to your competitors and people in the same business to find out if they have heard any rumours about your customer.

If you supply to a business and are concerned that they may be in difficulties, you could consider:

• Using a credit agency – they will provide you with access to databases with up-to-date financial information about businesses. You can find your customers’ credit-worthiness on the Equifax website- Opens in a new window and find your customers’ credit-worthiness on the Experian website- Opens in a new window.
• Accessing their accounts – if your customer is a limited company – on Companies House.

You should also speak to your customers. If they are struggling financially, you may be able to help them by renegotiating their payment terms. This may delay your income, but it could also retain the customer in the future by supporting them during a difficult period.

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