Nearly every successful company has had to face difficult times with tight cash flow and burdening debts at one point or another. However, only the most dedicated and resourceful entrepreneurs and business managers are able to handle the pressure and make the necessary adjustments. Put yourself in the class with those who’ve struggled but come out on top using the following 5 tips to improve your cash flow to debt ratio:
1. Reduce Unnecessary Expenditures
First and foremost you’ll need to reduce your operating cost as much as possible without drastically affecting the quality or efficiency of your products or services. This could mean utilising energy-efficient equipment and becoming proficient at saving power, reducing supplier contract commitments, terminating some employees, and selling some equipment or inventory that is costing too much to maintain or store. Eliminating frivolous overhead is perhaps the most important step in freeing up cash for more important purposes like investments and debt repayments.
2. Train Employees on Frugality
What is the point in trying your hardest to be frugal when none of your employees are trying their best to save money for your company as well? It is especially important to train managers, directors, and chief executive officers to ensure that the top of your workforce is able to pass on your mission and message to the entry-level employees. Holding employee meetings, offering reward incentives for employees that excel, and using employee monitoring software to keep an eye on productivity and efficiency are several ways you can improve your team’s ability to save money and increase cash flow.
3. Attempt A Company Voluntary Arrangement (CVA)
If your debt burdens are simply too much to handle and your creditors have turned down independent negotiations over the phone or via email in the past then you may want to consider attempting a company voluntary arrangement (CVA) proposal through a licensed insolvency practitioner. Most creditors are willing to accept a professionally drafted CVA because they know that the insolvency practitioner proposing the arrangement is putting their professional expertise on the line to strike a mutually beneficial deal that will give your company new repayment terms while also ensuring that creditors are able to collect their debts in the long-term. A CVA would give you lower monthly repayments and it could also help you eliminate employee and supplier contracts at no cost, both of which would result in additional operating cash flow.
4. Consider Financing Options
If a creditor is unwilling to approve a CVA or they are asking for a larger down payment to accept the agreement you may want to consider asset financing methods like invoice factoring and discounting or partial liquidation. Asset financing would let you use some of your company’s property or unpaid invoices as collateral in obtaining a secured loan or a cash advance. These funds could then be used to repay debts and/or make crucial investments that will help optimise your cash flow to debt ratio.
A partial liquidation could help you raise the funds needed to get out of debt, leaving you with a clean slate to continue operating on. Invoice factoring and discounting would allow you to trade in some of your outstanding invoices (payments that clients owe you) for a cash advance equal to 90% of the invoice amount. Although you would technically be taking a small loss when you consider interest, the ability to obtain the money sooner may give you the emergency funds needed to make repayments and avoid going out of business.
5. Enter into Administration
If none of the methods above are working and one of your creditors is threatening to send you into compulsory liquidation you may have no choice but to apply for an administration order and appoint an insolvency practitioner to act as the administrator of your company with the goal of facilitating a recovery. If the administration order is granted by the Court then you would be temporarily protected from any legal actions being taken against your company during the time the administration is carried out. Once the administration has commenced the administrator could work to set up a company voluntary arrangement (CVA) or utilise your company’s assets to improve cash flow.
Keith Tully is the managing director for Real Business Rescue, a UK-based insolvency firm specializing in providing recovery and restructuring solutions to struggling businesses. Keith has been involved in corporate insolvency for over 20 years and has supported many company directors in that time.
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