Availability of cash is critical for most businesses. However, those operating on a project-by-project basis could find it quite difficult to avoid falling into insolvency and sustain cash continuity. Putting an action plan in place for areas such as credit management might help them to maintain profitability and bridge cash flow gaps.
Businesses can be left with cash flow difficulties because of delays between new streams of work and, in sectors such as construction, the necessity to spend money on materials and labour before collecting any payment. In the long-term, being behind on the cash flow curve can end up costing businesses money by depleting their overall profit margins. For instance, a company which is put on stop by a supplier may find themselves struggling to secure credit, which forces them to take potentially expensive sources of alternative finance to keep the organisation afloat.
What to look out for
Two common warning signs that a company may be struggling to maintain a good cash flow are difficulties making payments and breakdowns in communication. Owner-managers may be tempted to bury their heads firmly in the sand when facing financial challenges but such a method risks damaging valuable supplier relationships and consequently worsening the problem.
How a contingency plan can help your cash flow
When things get tough, putting a cash flow contingency plan in place for areas like early communication with suppliers, is important to maintaining their support and dealing with any cash flow gaps. Furthermore, owner-managers can be provided with greater cash certainty by tightening up credit control measures and outsourcing cash collection before a crisis. This will help them to structure projects around key payment milestones.
However, concentrating solely on passing cash through the door by taking on new projects, regardless of their profitability, could eventually create greater financial problems for the future. Cash is not always king, and there is no gain in loss-making turnover.
When experiencing a shortage in cash, implementing a proactive approach is key to keeping suppliers on side and navigating cash flow gaps. Opening lines of communication with procurement partners, keeping an eye on profitability and turning attentions to credit management can help to set owner-managers on the road to recovery, whilst also protecting their cash position for the future.