Three crucial steps to improve your company’s cashflow as the debt warehousing deadline approaches

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Three crucial steps to improve your company’s cashflow as the debt warehousing deadline approachesAs nearly 60,000 SMEs prepare to repay warehoused tax debt to Revenue this year – here are three practical steps Irish SMEs can take now to maximise their cashflow to ensure that they are ready to deal with any challenges that could present themselves in the coming months

Yes – it’s good news that Minister for Finance Michael McGrath has finally announced that the Government will reduce the interest rate attached to warehoused tax debt to 0 per cent and will credit back businesses who made repayments at the original interest rate of 3 per cent. However, the fact remains that there is currently €1.72 billion owed by 57,000 businesses that must be repaid, or have arrangements to be repaid, prior to 1 May 2024.

As you know, warehousing of tax debt was introduced by the Revenue Office to help businesses that experienced cashflow and trading difficulties during the COVID-19 pandemic. The latest PwC Insolvency Barometer predicts over 1,000 insolvencies in 2024 and particular strain is being felt in the retail, hospitality and construction sectors. With such concern among insolvency experts, it is crucial that businesses now ensure they have a reliable source of cash flow to repay their debt when it falls due.

Revenue Commissioner Ruth Kennedy has encouraged businesses to engage with Revenue if they are facing financial difficulties but warns that “in the absence of meaningful and timely engagement with Revenue, Revenue will proceed with appropriate collection and enforcement action to recover the debt”.

As these 57,000 businesses prepare to make arrangements to pay what they owe, we have outlined a number of practical steps Irish SMEs can take now to maximise the health of their cashflow now so they are in a position to repay their warehoused debt or deal with any other challenges that could present themselves in the coming months.

And remember - while improving your business’s cashflow is a crucial step in surviving, it also offers the opportunity to thrive, realise new opportunities, take on new orders or expand and invest in your business. Those three steps are:

1. Review your cashflow position and do your cashflow projections

Strong cashflow is the lifeblood of any business. Therefore it’s always important to continually review the source of your cashflow when running, sustaining and growing a business.

Every small and medium-sized business should calculate a cashflow statement and forecast, identifying what the cash needs of the business are. These will typically include fixed costs, such as rent, insurance, telephone and broadband services, and variable costs including taxes, PRSI and operational expenses.

A proper understanding of your cashflow position will ensure a business can deal with the range of issues currently facing them such as inflation and supply chain disruptions as well as any big upcoming payments such as a Debt Warehousing bill. Cash flow projections can also support any decision related to growth such as purchasing new equipment, expansion plans or exploring new markets.

Importantly, having a forecast will also allow you to see more easily where potential savings can be made, such as by reducing or postponing non-essential services. It’s advisable to create a new cashflow plan every month or at least quarterly, depending on your circumstances, and this will help better control cashflow.

2. Review your customer base

Businesses should continually review their revenue stream to ensure there is no overreliance on one or two key sectors or customers.

Ensuring a wide customer base will limit your exposure to bad debt and enhance cashflow. A good rule of thumb is not to have 20% of your business with one customer, as losing that business would represent a sizeable hit to your income.

In addition, you should also consider your customers’ and suppliers’ own financial position as well. Good communication between businesses is now all the more important, so be conscious that your customers and suppliers may be struggling as well. Rising costs has meant that many businesses are experiencing payment delays, and this inevitably has knock-on effects throughout the wider supply chain as the cash conversion cycle lengthens. As a result, maintaining diversity across your customer base is more important than ever.

3. Review your funding solutions

SMEs can’t just rely on the mainstream funders coming to their rescue at the last minute. And, given that the process of securing suitable cashflow via the main lenders can also be extremely slow and complicated, SMEs need to cast the net wider in order to secure the funding supports they require.

This is where alternative lending solutions can deliver real value and a range of benefits above and beyond access to finance, including in-depth specialist market knowledge and strong client relationships. Invoice Finance, for example, allows businesses to raise cash against unpaid invoices, providing an immediate and ongoing supply of cash that grows with a business. Up to 90% of the value of an invoice can be paid within 24 hours – allowing business owners to pay staff, suppliers, pay a bill or take on new orders. Because it is not a loan, it doesn’t involve any additional debt, helping to keep cashflow healthy. Equally, unlike taking out a business loan, there are no fixed monthly repayments involved.

By converting your outstanding invoices into an instant cash flow lumpsum, Invoice Finance will free up the funds required to pay the upcoming Debt Warehousing bill. However, the Invoice Finance facility can also then be utilised on an ongoing basis to generate regular working capital to support various business costs and potentially take advantage of growth opportunities. In addition to assisting with cashflow, it’s worth noting that Invoice Finance can also be utilised to fund a range of other growth scenarios such as investing in infrastructure or equipment, funding Research and Development, financing an expansion, Mergers and Acquisition activity or simply stabilising a business during turnaround.

In many cases, alternative funding solutions are far more suited to their needs than traditional lending options and will provide SMEs with certainty of payment and more sustainable sources of liquidity.

By STEPHEN MCCARTHY - Bibby Financial Services