Finance Insight : Cash Flow, Credit & Finance

financial insight

Insight from our Credit & Finance Manager, Phil Holborough

As of May ‘24, UK insolvencies have reached a 30 year high! Further reading on the topic across a number of sectors suggests that we have yet to reach any kind of peak. Indeed, in a few short weeks into the calendar year, we have witnessed in the Steel Industry a series of surprising company failures – some long-standing customers with seemingly robust balance sheets, falling prey to formal financial restructuring or actual full insolvency. This is a worrying trend.

In a recent article in “Credit Management” magazine (the official journal of the CICM), Giuseppe Parla (Business Recovery Director at Menzies LLP) offers some insights into “How to spot a company in trouble”. He highlights the importance of payment performance and continual monitoring. He explains that “in most cases one of the first indicators that a company is struggling financially is poor cash-flow. If businesses are defaulting on their bills or having to negotiate extended payment terms with creditors, this is a sure sign that they are experiencing financial difficulties. Recognising these signs early on can be instrumental in avoiding potential financial crises…”

Largely I would agree with this, but that’s just part of the picture. In over 35 years of business finance experience across a number of industries, I can confidently say that most companies will experience cash flow issues at some point in their journey – new or old – the impact of slow payments from customers, bad debts or “unexpected” costs will have a negative impact on the day to day liquidity of companies. Navigating these choppy waters effectively is key to ensuring that confidence in the supply chain is maintained.  It is worth reminding ourselves that not all slow payers are on the brink of failure. 

An experienced and knowledgeable financial controller should be able to make very accurate predictions in respect of their business’ financial obligations – when the unexpected happens however, clear communication with creditors is vital to ensure that confidence is not lost. I believe that ultimately being true to your word is THE most important factor when cash flow issues arise. Only when there is a discrepancy between what is promised and what actually occurs does the supply chain breakdown and the fear of company failure surfaces.

Parla in his article also makes reference to the possibility of businesses not having access to mainstream lending and that as such any upward fluctuations in the base rate would have significant impact on available cash and, of course profit margins. This could ultimately lead to a slow down or halt in supplier payments – providing further worries and concerns from external suppliers.

The usual warning signs of potential insolvency are well documented – notifications of “restructuring”, key personnel changes, the “jungle drums” of the supply chain making their own assumptions (often unfounded), payment defaults, withdrawal of credit insurance support. These are more often the “red lights” – the early warnings of possible company problems. Poor cash management is only one ingredient – in the end effective, honest communication with business partners/suppliers when difficulties arise is critical.

Get in touch