Welcome to the second post in our 'Building a resilient balance sheet for 2021' series looking at solutions and opportunities for 2021 viewed through the balance sheet. We now look at current assets: typically, cash, inventory and receivables.
Business owners and directors have long given up worrying about vanity or even sanity. Even more so than usual, cash is king.
The Chancellor’s support to the economy, much of it due to expire this autumn, has been extended to the end of the year. This includes restrictions on lease forfeiture and issuing winding-up petitions.
From 1 December HMRC preference on insolvency is also being reinstated. If a business fails after 1 December, its lenders will probably get back much less than previously. Lenders are already taking this into account when making credit decisions. Security will not be as valuable as it was, and lending will be constrained at a time when it is needed. Stock finance will be particularly affected.
Why is it important to have effective cash generation and control?
All of this illustrates the need for effective cash generation and control. Find out as much about new customers as possible before giving credit. Are you selling to a well-capitalised company or a newly incorporated subsidiary? If the latter, work out why before giving credit.
A good credit control team with constructive customer relationships is worth its weight in gold. They will help separate the ‘can’t pay’ from the ‘won’t pay’ customer. Deal with each accordingly. Make sure that debts are acknowledged and paperwork is in place. Creativity might help with the former group, especially if you wish to keep them as a customer. In both cases be firm with payment for new supplies.
Finally, unused inventory is often better turned into cash, whatever the sale value. And many businesses have used the last few months to re-engineer their stock buying processes and reduce what they hold (and have to pay for). Reduced inventory also means reduced finance needs.
In our next post, we look at creditors with some views on the current state of the lending markets.