What causes temporary cash shortages?

Nearly all businesses experience cash flow problems at one time or another. And when they happen, you need to act quickly or risk them damaging your longer-term performance.

Temporary cash flow problems can happen for a variety of reasons, including:

1. Your customers being unable to pay you due to insolvency.
2. Seasonal fluctuations in demand for your products or services.
3. Unexpected costs caused by plant and machinery breakages.
4. Increased input costs such as materials, labour or other overheads.

If you do not have adequate cash reserves to weather a short-term cash emergency, or have not planned how to run your business during such a period, you may struggle to maintain a healthy cash flow for the longer term.

A temporary cash flow issue may also indicate an underlying problem in your business that, if not resolved, could bring it to a shuddering halt. The good news is that cash shortages are often a temporary blip, with no detrimental impact on the long- term viability of your business. However, when you are faced with a cash shortage, you need to act fast and take control.

What are the key indicators?

Having a dashboard of financial indicators can help you monitor your cash flow, enabling you to spot warning signs and prevent any long-term damage to your business. Keeping track of debtor book receipts versus expectations, items payable versus standard terms, and weekly cash balances versus projections are just some of the metrics you should be monitoring.

When faced with a temporary shortage of cash, it is vital that your key functions work collaboratively together. Burying your head in the sand or ignoring the KPIs can make an easy problem to solve much harder.

Managing Director/CEO

The Managing Director/CEO needs to take control of the emerging situation by fully understanding the issue by carrying out root cause analysis. It is important to make sure that the issue is a one-off by putting in place procedures to prevent it happening again.

Forming a closer working relationship with the Finance Director on projecting and monitoring the weekly near-term cash flows is time worth investing. There will undoubtedly be a need to work much closer with other business units on coordinating the remedial action plan. Instigating daily huddles and deploying a ‘plan, do & review’ process to fix the problem.

In any emerging cash flow situation, the FD needs to take responsibility for identifying internal and external solutions to mitigate the short-term deficiency in cash. This is typically done by monitoring cash balances on a daily basis and building weekly projections to maximise visibility and flag problems early.

Finance Director

The Finance Director should also focus on identifying internal solutions which may include selecting debtor-customers for an early pay discount offer; agreeing a monthly versus quarterly rent payments to alleviate pressure; considering reverse factoring solutions on payables to suppliers; and investigating potential delays to capex expenditure.

Similarly, the FD should identify external solutions such as increasing the bank overdraft, raising a shareholder loan, considering sale-and-leaseback of company assets such as property or equipment, and exploring if the company insurance covers the specific shock.

Sales and Operations

The Sales and Operations teams must also work more collaboratively to support the MD and FD as the emerging situation unfolds. Responsibilities may often include carrying out the remedial plan, pivoting to a near-term payment strategy to speed up cash flow receipts on current jobs or projects, or identifying if automation or process redesign will enable resources to be deployed elsewhere to increase value.

Key points

The best solution normally reflects the nature of the problem. If the temporary cash shortages cannot be alleviated through faster revenue receipts or slower cash outflows, a temporary overdraft or short- term loan is often the most viable solution. Remember, if you can convince yourself that the problem is purely temporary, you should also be able to convince third parties.

I hope this article has provided some useful tips on what may trigger a temporary cash shortage and how your teams should work together to mitigate any long term damage. See how we helped Acacia Associates overcome a short-term cash flow problem in our success story below.

We work with growing UK SMEs and small-cap PLCs that have funding needs in excess of £2m and regularly approaching £100m. Our clients’ needs will typically be for sophisticated finance products such as cash flow based lending or private equity investments. Our value lies in helping clients access funding that relies on confidence in future trading and cash flows. For a confidential, independent, no obligation discussion on the funding options available click the 'Let's chat' button.