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Cash is king

Authored by Phil Meekin

Phil Meekin

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Approximate read time: 3 minutes

The old adage ‘cash is king’ has never been so relevant.

The recent financial rally in Europe and a whisper of optimism over the state of the banks has certainly substantiated this phrase but a simple case of semantics dictates these three words tell a very different story. Insolvency Service figures are painting a bleaker picture for SMEs up and down the country.

Despite these figures, we cannot underestimate the importance of SMEs. They now account for 99.9 per cent of all enterprises.

They also accounted for more than half of employment (59.1 per cent) and almost half of turnover (48.6 per cent) in the UK private sector, at the start of 2010, according to statistics issued by the Department for Business Innovation and Skills. So it stands to reason that the growth which our economy desperately needs is reliant on the wellbeing of SMEs.

Each business which has to cease trading will have its own reasons. But whatever the underlying cause, the crunch comes when a business grinds to a halt due to lack of cash.

Some will have been unfortunate and hit by unforeseen circumstances – the extended wintry weather last year is one example. But many of these examples will, unfortunately, have been down to poor financial management, and in particular cash flow. In the past I have met many experienced business owners who actually didn’t know the difference between cash flow and profit.

I’ve seen directors pop champagne bottles when they won a contract they thought would cement the future of their business. In fact the same contract caused the demise of the business, simply because it didn’t have sufficient cash to see the contract through.

This attitude is understandable considering the past stability of the economy and availability of funds through banks. The bank manager is the first port of call when a business is in need of a financial boost. But, despite a few public floggings from the Government, accessing money through the banks is proving to be very difficult for many SMEs, with scores of bank managers finding their hands tied.

But as disheartening as this can be, there are still options.

The Asset Based Lending (ABL) sector is reporting booming business. Using invoice finance (factoring or invoice discounting) can certainly fund cash flow in many cases, particularly for expanding businesses. Raising cash against unencumbered plant and equipment may be an alternative way to plug the funding gap.

There will be occasions when the ABL sector cannot help. At that stage, it is an easy option to give up and ‘throw in the towel’ – but that has to be a last resort after the amount of effort involved in building up a business to start with.

Another option may be to try attracting private investors. If a company’s balance sheet is weak or overburdened with historical debt, they’re likely to be reluctant to pump money into what they think may be a lost cause. It is often in these situations it may be essential to restructure the business making the deal attractive to investors.

Many entrepreneurs are looking at every option to buy time or help them to restructure. One major problem, however, is many business owners have limited knowledge of what is available and how it could work for them.

For a business which is desperately short of cash flow, the worst thing to do is…nothing. Taking independent professional advice gives your company more options, a better chance of preserving jobs and a better chance of survival. As well as potentially being a better outcome for your suppliers, too.

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