Cash flow management – too little or too much?

Too little?

A lack of cash flow can be like a heart attack to a business, and it is often what can keep a Director up at night.  Businesses have had a torrid few years from Brexit to the Pandemic to Wars to Economic instability, and unfortunately, these experiences have been an unwelcome learning curve for many, with a lot of businesses having to scale back unnecessary costs and prioritise cash flow just to stay alive.  There are a number of measures that businesses can take to improve their cash flow and monitor their KPI’s, see our previous articles on these topics.

Ultimately too little cash is a real stressor for any business and inhibits growth opportunities.  At worst, it can cause the business to flatline or at the very least be detrimental to achieving the strategic objectives of the business going forward.

Too much?

Conversely, whilst acknowledging that there are many businesses reeling from the impacts outlined above, there are also a number of businesses that have either traded strongly in recent years and/or maintained security in the form of excess cash flow levels.  This presents a different challenge for the business in the form of surplus funds.  Surplus funds can actually stall the growth of a business through a lack of investment and can even impact the status of the business for certain tax purposes.  The real cost is the opportunity cost of this cash not being put to work and invested effectively.

One positive of current interest rate levels is for those with surplus funds, and at the very least these funds should be invested into an appropriate account that will see the business benefit in the form of interest received – however, beware of any restrictions if you plan to access this cash at short notice.

In terms of other options, this cash could always be extracted in the form of pension contributions, paying down any existing expensive debt, building goodwill with suppliers, investment in research and development, employee bonuses/benefits (in a market where employee value proposition is still key) or to the shareholders via dividend.  Again all of these would need to be considered in the context of the business and advice would need to be sought.

The government is still keen to see businesses invest and there seems to be a lot of appetite amongst funders to assist in this regard.  This could be in the form of acquisitions in the market or in capital expenditure.  Specifically in terms of capital expenditure, there are also tax incentives and whilst the super deduction for plant or machinery expenditure came to an end on 31 March 2023, the new ‘full expensing’ measure was introduced in April 2023.  The Annual Investment Allowance has also been maintained at £1m, meaning that businesses continue to see accelerated capital allowances up to this level on eligible expenditure. 

Finally, excess cash can be used as a means to support succession planning, a common topic at present.  There are ways that these funds can be used to facilitate a vendor exit, for example via Management Buy-Out or sale to an Employee Ownership Trust.  Again further advice, particularly around the tax implications, would be needed in this respect and please speak to your adviser as this is a complex area.

How much is enough?

This is extremely difficult to answer as it will depend on the nature of the business, as well as its strategic objectives and plans for the future. It also depends on risk appetite and the life cycle of the business. The level of working capital to be held at any one time really will depend on the individual business. Ultimately however this emphasises the need for up-to-date and timely financial information, tight financial controls, and regular cash flow forecasting, to enable Directors to make informed and educated decisions aligned to the business needs and its strategic objectives.

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