The old adage that “cash is king” has never rung truer than it does in the current economic conditions. Without healthy cash flow, businesses cannot hope to survive for very long – even at the best of times – let alone grow or proceed with acquisition plans. When considered in the current credit-challenged times, cash flow management and forecasting takes on an even greater significance.

The lack of available credit for businesses from traditional sources has led to an increase in enquiries into alternative funding options such as receivables finance and asset-based lending (ABL). Research commissioned by Venture among 1,000 UK accountants revealed that the number of business clients being refused finance by traditional lenders has virtually tripled this year.

In addition, 60 per cent reported that they had seen an increase in business owners proactively seeking to learn more about alternative methods of funding. It’s a figure that didn’t surprise Andy Coveney, refinancing and turnaround specialist at accountancy firm Campbell Woolly, who comments, “Today’s financial managers must understand the cash dynamics of their businesses. The key to successful financial management at present is to use this understanding to anticipate issues and then to communicate with funders and stakeholders early and honestly.”

Real world solutions

Businesses looking to improve vital cash flow, both short and long term, can consider receivables finance, which enables funding to be leveraged against unpaid invoices without waiting for customer payment, thereby delivering an immediate boost to cash flow. Revolving receivables and inventory finance can be combined with fixed-asset and collaterised cash flow term loans to provide even more liquidity.

ABL unlocks the hidden value of a business’s assets by raising funding from the various assets a business owns: the debtor book, inventory, plant and machinery or property. This can then be used to ensure working capital, and enable stability, growth or turnaround plans to be realised.

Venture’s experience has shown that the provision of collaterised cash flow term loans can be a lifeline to companies in these turbulent times – offering stressed businesses the extra headroom required to execute their well-laid-out restructuring plans. For companies willing and able to re-engineer, restructure and create a viable business plan going forward, this facility can make all the difference – but only if the lender is brought in at the right time to work in partnership with the management team.

Financial modelling is vital, and tight cash flow management is often the difference between success and failure. Says Coveney, “The ability to successfully predict the true cash dynamics of a business comes from a clear financial overview. Using this overview to conservatively model and project cash flow in the current climate is essential.

“If financial information is ordered, up to date and clear, any business’s financial performance can be modelled to understand how bank headroom and covenants are affected by changes in the main business variables (sales, margins, capex, debtor payment rates, etc).”

Clearly, working in close partnership with a lender has never been as important as it is now, during these fast-moving times – cash flow can change for the better or worse almost overnight. It’s a point taken up by Coveney, who comments, “Once a management team can anticipate likely financial and cash flow issues, they must be communicated in a timely fashion to funding providers and other stakeholders. If possible, always avoid giving this important group of people surprises.”