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Cash-flow deficit

A cash-flow deficit occurs when the cash available is insufficient to pay expenses as they fall due. In the event of a cash-flow deficit there are a number of options which businesses should be explored, including:

• Bank overdraft facility. It may be possible to obtain a temporary overdraft facility to enable your business to meet its obligations for a short period of time
• Short-term loans, which typically attract more favourable rates of interest than long- or medium-term loans
• Acceleration of collection of amounts due from debtors
• Reducing or deferring of expenses. Examine your projections to see if there are any costs that can be cut or deferred, for example you may be able to negotiate a delay in payments to creditors
• Fundraising activities. These are more suited to long-term cash-flow deficits
• Converting liquid assets into cash, through for example the sale of investments. Again this is more suited to longer-term cash deficits.

Preparations and projections

If you have prepared your robust cash-flow projections, you will have a greater amount of time to examine your available options, and to select the most appropriate for your business. Robust projections also put you in a stronger position to approach your bank, or other suppliers, well in advance of a cash-flow shortage.

These projections will also demonstrate that your business has good financial management practices, which will support the case for your application to the bank or other creditors. When you do see a problem coming down the line, don’t bury your head in the sand. Meet with your bank as early as possible to explain your dilemma and to agree a solution – armed of course with your projections and assumptions.

Cash-flow surplus

In the event that you expect your cash receipts to exceed your payments, leaving you with excess cash, O’Brien suggests a number of possible options:

• Use the idle cash to pay down any outstanding loans
• Invest in low-risk short-term investments which yield higher rates of return than your current arrangements
• Purchase supplies in larger quantities to avail of volume discounts.

Timely preparation of good cash-flow projections should enable you to anticipate problems early and give you time to formulate a plan to address them. Given the challenging times that businesses face in 2010, now is the time to start the process of preparing your projections, so as to identify early warning signs. It is vital that management stay on top of cash flow and and keep it flowing.

This is an edited extract from an article which first appeared in the Owner Manager magazine guide Business Planning 2010.