Is there a storm ahead? Cashflow management is key

The UK economy shrank in April, contracting by 0.3% after a previous drop of 0.1% in March. The figures published by the Office for National Statistics (13 June) shows all main areas of the UK economy – services, manufacturing and production have shrunk for the first time since January 2021.

Whilst the drop in output in all areas has surprised many in the city, there is no doubt that there will be some more difficult times ahead if this trend continues. There are however practical steps that all businesses can take to prepare for what may lie ahead.

They say that cash is king and cashflow management must be the number one priority over the coming months. Effective cashflow management will enable businesses to weather any disruption as best they can to be in a stronger position to grow in the future.

There are other steps that you should also consider:

1. Cut non-essential expenditure 

Review your current business plans and cut out any non-essential expenditure immediately. It may be that these plans can still happen, they are simply deferred, however until you have undertaken more detailed scenario planning and have a clearer understanding of how long this economic uncertainty could last, then current spending should be limited to just essential items. But be careful that you don’t drop your marketing budget so low that everyone forgets about you!

2. Scenario planning

Prepare short term cashflow forecasts based on different scenarios that your business may face in the coming 3, 6 and 12 months. The details of these scenarios will be dependent on your sector and business model.

The likelihood is that none of the scenarios you plan for will come to fruition, however the process of looking ahead and preparing these forecasts will focus your attention to critical areas and will allow your thinking to be more agile, and to make quicker decisions as the economic environment changes.

3. Speak to your suppliers and creditors 

Now more than ever it is vitally important to have open and honest conversations with your suppliers and creditors. Some may be having similar concerns to you, so may not be able to extend payment terms. However, being transparent and open with them now, will hopefully build stronger bonds and continued relationships.

It may also be necessary to consider reducing credit terms for customers who are slow to pay or are in a more precarious position in order to accelerate cashflow and minimise risks to your business.

4. Speak to your lenders

Ensure that you are clear about the message you wish to give to a lender before you approach them. Cash conservation is a key strategy for many businesses during tough economic times, but there is also the impact of inflation to consider in the longer term.

Lenders will wish to see businesses continue to thrive and should be empathetic to customers who are taking sensible strategies, so prepare cashflow projections before any discussions with your bank or lender and we are always there to support you if you need help in preparing these projections.

5. Make use of HMRC’s Time to Pay facility

Any business with outstanding tax liabilities (e.g. PAYE, VAT, Corporation Tax) may be eligible to receive support in deferring any payments due to HMRC for a limited period. It is always better to be upfront with HMRC if you are having issues. Each request is reviewed on a case by case basis and the taxpayer needs to contact the HMRC Payment Support Services.

6. Are you paying the right amount of VAT?

Depending upon the basis of your VAT registration, some of the tips below from our VAT Director Colin Laidlaw may help you.

• Maximise the VAT you are entitled to – Are you recovering all the VAT on expenditure, such as staff expenses?
• Ensure reliefs are identified – Are you paying VAT on expenditure (or income) you shouldn’t be (are there reliefs available)?
• Bad Debt Relief – Have you claimed Bad Debt Relief (although remember these rules also require you to pay back VAT to HMRC if you haven’t paid a supplier invoice)?
• Applications for Payment – You can assist your sales VAT cash flow by issuing Applications for Payment for ‘continuous supplies’ rather than full VAT invoices, so that VAT is due when you are paid by customers?
• Alternative Evidence claims – Have you paid VAT you cannot claim due to a lack of an invoice – consider alternative evidence claims?
• Cash Accounting Scheme – Can you switch to the Cash Accounting Scheme to delay VAT due (although this also affects the ability to claim VAT on purchases)?
• Customs Duty savings – Have you paid the right amount of Customs Duty, or is there a more appropriate, lower, rate for the goods imported?
• Overseas VAT costs – Have you incurred VAT overseas you haven’t recovered – is it worth making a claim?
• Move to monthly returns – If you receive regular repayments, are you on monthly VAT returns?

7. Be creative 

We saw a huge amount of creativity from businesses of all sizes during the pandemic and that might be needed again. You will likely have a loyal clientele and there might be various ways you can continue to sell to them to provide immediate cash for your business. Consider special offers, loyalty schemes and larger discounts for up-front payment.

Running your own business is tough but it shouldn’t be lonely, so do get in touch to discuss how my team can help you to prepare for whatever lies ahead. We are in this together.

For more information about the topics explored in this article, get in touch.