Friday, June 10 2022


A severe shortage of working capital is set to lead to a growing number of business bankruptcies as companies responding to the takeover become overstretched and insolvent due to a lack of cash, a restructuring expert warns.

Working capital is the cash available to a business that is unrelated to its day-to-day operations and is a key indicator of the health of a business.

Nicola Clark, restructuring partner at SME specialist Azets in the North West, warns the economy is reaching a point where a shortage of working capital is becoming increasingly common.

She said: “When a recovery is underway and business and consumer demand increases, many businesses will face a working capital crisis. Entrepreneurs naturally want to look for opportunities, but if the cash coming into the business is not synchronized with the cash leaving the business, the business will not be able to meet its obligations and will quickly find itself in a position of loss. insolvency, commonly referred to as overtrading.

Nicola added, “Most working capital issues arise when there is a gap between a sale and the collection of the money. Meanwhile, overhead costs continue, staff and taxes have to be paid, and cash flow problems worsen. If supplier credit conditions are tightened but sales increase, the need for working capital becomes greater and a company with increasing demand can quickly face a cash crisis and insolvency. Our economy is heading to the point where working capital problems will become much more prolific. »

Nicola Clark is urging directors and business owners in the region to act quickly rather than hoping to negotiate through a working capital problem, a common response that will often worsen the cash flow crisis.

She notes some steps companies can take to optimize their financial situation.

Financial datas – Decisions should be based on accurate, real-time financial information with investment in quality software, systems and people.

Visibility – A 13-week cash flow forecast to track all pending receipts, payments and costs is a prerequisite, otherwise the business is financially blind.

Proactive billing and collection – A forensic review of all processes that turn orders into cash will identify inefficiencies in cash retention and cash flow.

Review Inventory Strategy – Match inventory to orders and adopt a “just in time” stocking policy.

Relations with stakeholders – A communication plan should be prepared for each group affected by cash flow issues, from customers and investors to staff and suppliers.

Nicola concluded, “Economic recovery is naturally hailed as a welcome respite from economic problems, but it still brings financial challenges for businesses, including working capital and cash flow crises.”

“Despite the financing and equity options that may be available to businesses, cash is still king. Cash is essential to repay debt and fund growth, but a shortage can lead to failure and is often a problem that can be avoided with early intervention.

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