In the first post in this series, we looked at what business resilience means and why it's worth investing time in, whatever stage your business is at.
In this post, we're getting into the details, starting with the area that underpins everything else – your finances.
Maintaining a healthy cash reserve
Cash flow problems are one of the most common reasons businesses run into serious difficulty. Even profitable companies can find themselves in trouble if cash is tied up in operations or customer payments are delayed and it happens more often than most owners expect.
A good starting point is to build a cash reserve that covers at least three months of operating costs. This gives you a buffer against the unexpected, whether that's the sudden loss of a major client or a cost you hadn't planned for.
Estimating the right level of reserve can be tricky, particularly when costs are rising, so it's generally safer to plan for a worst-case scenario rather than a middling one.
Review your cash position regularly and set a target reserve that reflects your business's own risk profile. If you're not sure what level is right for you, that's exactly the sort of question your accountant should be able to help with.
Strengthen your cash flow forecasting
Understanding your cash position at any given moment is essential during uncertain periods. A rolling 13-week cash flow forecast gives you a clear short-term view of your financial health and helps you spot potential shortfalls before they become a genuine problem.
A useful forecast should track:
- Expected customer receipts
- Payroll and operating costs
- Supplier payments and loan repayments
- VAT, Corporation Tax and other tax liabilities
- Planned capital expenditure
Together, these give you a clear picture of your cash flow, so you can prepare for shortfalls or take action to finance the business ahead of time. In some cases, invoice financing can provide a loan against outstanding payments to help bridge a gap.
If you're heading into a period of higher investment or lower income, increase how often you review the forecast and update it as things change.
Stress test your finances
Testing how your business would cope under different adverse scenarios is one of the most useful ways to spot vulnerabilities before they become real problems.
Scenarios worth modelling include customers taking 30 to 60 days longer than usual to pay, a fall in revenue of 15 to 20 per cent, rising costs in wages, energy or materials, a key supplier failing or raising prices sharply and higher interest rates on any variable rate borrowing.
Running these models helps you see where your business is most exposed, so you can put contingency plans in place well before you actually need them. Don't leave this until conditions are already difficult.
Review your funding structure
A business that relies heavily on a single source of funding, such as an overdraft or one investor, is more exposed than one with a broader funding base. Worth reviewing:
- Revolving credit facilities for short-term working capital flexibility
- Invoice financing to release cash tied up in unpaid invoices
- Government-backed loans or grants relevant to your sector
- Asset finance for capital expenditure, which preserves working capital
If access to funding is a concern, talk to your accountant before you approach lenders. Well-prepared accounts and financial forecasts make a real difference to your chances of securing finance on good terms.
Manage costs proactively
Reviewing your cost base regularly protects your margins and preserves cash and it doesn't necessarily mean cutting across the board.
Look instead for expenses that no longer earn their keep, contracts that could be renegotiated and reliefs or allowances you might not be making full use of.
A cost review at least once a year and more often during challenging periods, can make a meaningful difference to your financial position and profitability.
Keep on top of tax and compliance
One of the most common causes of business distress is a sudden tax bill or an HMRC investigation landing out of nowhere.
Falling behind with tax compliance risks penalties and interest, and it also means management time gets pulled away from the business to deal with queries that better record keeping could have avoided.
Including tax payments, such as Corporation Tax, VAT and PAYE, in your cash flow forecast means you're never caught short when a payment falls due.
Your accountant can also help identify legitimate tax planning opportunities, such as capital allowances or carry forward, that ease the pressure on cash and free up money for reserves or investment.
The legal and tax structure that made sense at incorporation isn't always the most efficient one years down the line, so it pays to review it periodically rather than leave it untouched.
Coming up next
Strong finances give you the foundation, but resilience doesn't stop at the numbers. In the next post, we'll look at operational resilience, covering how diversified your client base is, the strength of your supply chain, the technology you rely on day to day and why every business needs a business continuity plan.
This is the second post in our four-part series on building business resilience.
← Previous: Intro to business resilience | Next: Building operational resilience →
