Published on March 12th, 2013 | by admin0
Debt Advice for Small Businesses: Liquidity Planning
According to the UK National Statistics, numbers of VAT registrations and de-registrations have both increased since 1994. However, the growth of both numbers does not show a direct correlation, showing an increase of 13 per cent for new registrations in 2007 compared to the year before, as opposed to a growth of only two per cent of de-registrations in the same time.
Interestingly, mostly young companies in their first five years go bankrupt because of liquidity difficulties. Therefore, a decisive number of business closures may have been prevented if the owners had undertaken an on-going liquidity planning. Businesses who need advice how this can be done could take a look at Business-Debt-Management.co.uk
How to do a Liquidity Planning
A proper liquidity planning must be done for the next upcoming six or 12 months. The liquidity planning is confronting the expected costs and income, as opposed to accounting where actual expenses and income are considered. Here, expected costs and income should be assigned to different categories such as costs for human resources and property costs, or as income from sold products and services.
The resulting positive overlap can be used to pay further invoices. Indeed, the whole planning is senseless if costs and income either have been estimated wrongly, or not to its full extent. The management should think in detail about fixed costs (rents, human resources, leasing contracts), interests for loans, supplier invoices, clients’ payments and so forth. Above that, the business should have a cash reserve which should be enough to support the business over three months in case of negative cash flows.
In case a shortfall is expected, actions to prevent it must be taken. For instance, customers shouldn’t be given a long payment period. In contrast, it should be asked for part payment and cash back in case of prompt payment be offered.
If the business is already in debt, a payment plan should be arranged with suppliers and creditors. To decrease the fixed costs, it could be considered to sell business equity, subleasing a part of the office or moving to a cheaper location. Managers should not overuse the credit card limit, and care should be taken that credit cards with the highest interest rate are paid-off as soon as possible.
If the business is unable to get its debts under control, it should seek the help of a business debt specialist who can show the company some further options. For more information, click here.