For many business owners, seeking funding is a natural part of running and growing a business. Whether it’s investing in...
Business growth is generally something to celebrate. More customers, increasing sales and new opportunities are often signs that a company is moving in the right direction. However, growth doesn’t always translate into improved financial stability. In fact, some businesses experience their greatest cashflow pressures during periods of expansion.
Understanding why this happens and recognising when financial commitments are becoming difficult to manage, is important for directors who want to protect the long-term future of their business.
Growth can create additional financial pressure
When a company secures new contracts or experiences increased demand, it often needs to invest before receiving payment. This might involve purchasing additional stock, employing more people, investing in equipment or increasing production capacity.
While the additional work may be profitable, the business still needs sufficient working capital to cover those initial costs. For example, a company that secures a substantial new contract may need to purchase materials and pay employees several weeks before receiving payment from its customer. If the company doesn’t have enough cash available to bridge that gap, a positive commercial opportunity can quickly become a financial challenge.
Profit and cashflow are not the same thing
One of the most important distinctions for business owners is the difference between profitability and cashflow. A profitable business generates more income than expenses over a particular accounting period. Cashflow, however, reflects the actual movement of money into and out of the business.
A company may be profitable on paper while experiencing difficulties meeting its immediate financial commitments. This can happen when customers take longer to pay, substantial amounts of money are tied up in stock or significant expenses fall due before expected income arrives.
Understanding both profitability and cashflow is essential when assessing the financial health of a business.
The impact of increasing overheads
Business growth often brings additional operating costs. These may include:
- Recruiting additional employees.
- Moving to larger premises.
- Purchasing vehicles or equipment.
- Increasing stock levels.
- Investing in technology or infrastructure.
- Taking on additional borrowing.
- These commitments can support future growth, but many introduce regular financial obligations. If expected income is delayed or growth doesn’t materialise as anticipated, the business may find itself managing a higher cost base without the cashflow needed to support it.
This is particularly challenging where costs are fixed and cannot easily be reduced.
When customers take longer to pay
Late payments can affect businesses of every size, but the impact can be particularly significant for smaller companies. A business may have completed work, issued invoices and recorded the income, yet still be waiting for the money to arrive. Meanwhile, suppliers, employees, lenders and HMRC still expect payment.
When several customers delay payment, or one major customer accounts for a significant proportion of outstanding invoices, the financial pressure can increase considerably. Maintaining clear credit control procedures and understanding customer payment patterns can help businesses identify potential problems. However, where overdue payments are already affecting the company’s ability to meet its obligations, a wider assessment of its financial position may be necessary.
Is additional borrowing always the answer?
When businesses experience cashflow difficulties, additional finance may appear to offer a straightforward solution. And in some circumstances, appropriate funding can help a viable business manage short-term working capital requirements. However, borrowing introduces additional commitments. Before taking on further debt, directors should consider whether the business can realistically afford the repayments and whether the underlying financial pressures are temporary or likely to continue.
Using additional borrowing to address an ongoing shortfall without understanding its cause may increase the company’s financial difficulties. The suitability of any finance arrangement will depend on the business’s circumstances and its ability to meet future commitments.
Understanding your company’s financial position
Directors should have access to reliable, up-to-date financial information to support their decisions. This includes understanding expected income, upcoming expenditure, existing borrowing and the company’s ability to meet its financial obligations as they fall due.
Regular cashflow forecasts can help identify potential shortfalls before they become immediate problems. It is also important to consider how changes in trading conditions could affect the business. For example, what would happen if a major customer delayed payment, sales fell unexpectedly or operating costs increased? Understanding these scenarios can help directors make more informed decisions about investment, borrowing and future commitments.
What if cashflow problems are becoming difficult to manage?
Not every cashflow challenge means a business is insolvent, however, persistent difficulties meeting financial commitments should not be ignored. Where a company is struggling to pay creditors, relying increasingly on borrowing or unable to meet liabilities when they fall due, directors may need specialist advice about the company’s financial position and their responsibilities.
Depending on the circumstances, there may be options to address financial pressures, restructure commitments or consider more formal solutions. The appropriate approach will depend on the company’s financial position, its commercial viability and the interests of its creditors.
How Lines Henry can help
At Lines Henry, we understand that financial difficulties don’t always arise because a business is unsuccessful. Sometimes companies experience pressure because they are growing quickly, facing changing market conditions or managing financial commitments that no longer reflect their circumstances.
Our experienced team works with business owners and directors to assess their financial position, understand the challenges they face and explore the options available. We provide confidential, practical advice in straightforward terms, helping directors understand their responsibilities and make informed decisions.
If your business is experiencing cashflow difficulties, increasing debt or pressure from creditors, Lines Henry is here to help. Our initial consultation provides an opportunity to discuss your circumstances and understand what options may be available.
