• The risk of a cash flow problem is raised as the economy bounces back
  • Long-time customers may have hidden working capital problems
  • A cash flow forecast can help but won’t solve all problems

Trading systems have largely re-opened after a disruptive couple of years, but while there is a sense of optimism from UK and Irish businesses, there is also a heightened awareness of cash flow risks.

Head of Special Risk for Allianz Trade UK & Ireland, Jason Robinson, says:

The key question with this recovery will be: will companies run out of cash.
Known as overtrading, healthy businesses can fail if they begin to run out of cash, perhaps because they took on new customers who are paying too slowly. Remember, growth always eats capital.
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Potential cash flow problems

It is important to recognise that your biggest customers could be in trouble following the withdrawal of  government support such as furlough schemes. Jason explains: “If you are funding your customer’s growth, how well do you know your customers? If they run out of cash, will you run out of cash?

It's also worth bearing in mind that your own cash profile may have changed in response to the pandemic; perhaps moving online in order to increase sales, or accepting electronic payments. p. Also affected will be  DSO, a poorly-known yet key indicator for cash flow. The combined effects may not become clear until volumes rise.

Rising costs and  supply chain problems (ranging from wood to micro-chips) means that industries d such as retail, hospitality and leisure, may need to consider price increases, particularly as landlords will be expecting full payment. “The key to sustainable growth will be cash, cash, and cash,” Jason adds.

Working capital

There is an additional psychological risk for business owners who successfully made it through the pandemic, particularly in hard-hit retail and hospitality sectors They may feel the joy of someone who has scaled Everest and is ready to go back down. But they should be wary: on the world’s highest mountain, statistics show more people die on the descent than the ascent.

In the hardest-hit sectors, the lifting of social controls has felt like a fresh start. But that means businesses will have to behave almost like startups, with the associated financial risks.

A greater level of caution should be taken to retain a buffer of working capital in case local and national restrictions are once again imposed.

Business lending

The Federation of Small Businesses’ survey data shows that banks refused business credit in the first quarter of 2021 at double the rate of previous months. Prior to the pandemic, businesses with a large amount of orders but facing cash flow risk could turn to their banks.

This isn’t all negative, as society normalises, there are huge opportunities for many businesses. Those who were able to protect their cash flow and build up their savings, are in a good financial place. The pandemic has created winners and losers, economically, and the winners in the UK have been stashing £20bn into their savings account each month, HSBC calculates. If a fraction of that turns into consumer spending, then the opportunity is very real.

Cash flow forecast

 

To seize this opportunity without risk of overtrading, cash flow forecasting is essential.

A detailed, 12-week cash flow forecast should cover the short-term period of opening up. Ask: at the end of this forecast, do I have cash on hand in case of further lockdowns or major customer defaults? Here’s a guide on how to make a cash flow forecast.

In some cases, a less detailed, longer-term cash flow forecast can provide a different strategic direction that may work best for your business.
Sorina Eremia, head of underwriting at Allianz Trade UK & Ireland says:

“Owners often know what funds are needed day-to-day but if they are unclear as to how much revenue is being generated and actually cashed-in, the disconnect can be disastrous."

While a cash flow forecast is vital, the current economic uncertainty means that there is no guarantee that cash flow will be sufficient long term, or if long-standing customers will suddenly default on payment.
There are techniques to liberate cash from working capital, for instance negotiating better payment terms with customers.

  1. The greatest weapon in your arsenal however, is  trade credit insurance. This tool will help safeguard your business against credit risk, allowing for any upswing opportunities. The service that you receive is broken into three tiers: Insurance that safeguards your business and cash flow in the event of customer default or insolvency.
  2. Collection of unpaid debts allowing your team to focus on growing the business.
  3. Credit checks and monitoring of customers which is invaluable amid such uncertainty.

The final service tier is arguably the most important as it underlines how trade credit insurance is different from other forms of business insurance. While other conventional insurance policies only create a dialogue with the insurer around the claims system, trade credit insurance makes the insurer an active partner, helping manage the risk at its source. It starts with a check of the credit profile of existing customers and then analyses each new customer as they come onboard.

This guidance is possible because trade insurers sit at the centre of a vast information network, seeing payment stress unfold daily not just at the level of sectors or countries but also individual companies. This know-how is fed back to clients in the shape of credit limits that can help guide decisions that will loom as the upswing takes hold, such as whether to accept a landmark order, grow into a new section of the market, or attack a new export location.

Allianz Trade is the global leader in trade credit insurance and a recognised specialist in surety, collections, structured trade credit and political risk.