The ultimate cash flow guide - shawllp.co.uk · At Shaw & Co we support many businesses when cash...

The ultimate cash flow guideEight causes of cash flow problems & how to fix them

Why read this guide?

Small businesses account for 99% of all private UK businesses, almost two thirds of employment and around half of turnover. But many find it difficult to reach their full potential due to a range of cashflow issues. Some of these may be self-inflicted, such as not applying the right level of financial expertise or not having the legal capability to challenge the terms of contracts with customers or suppliers. Other causes may be out of their control, especially when dealing with larger companies or if they are part of a supply chain.

Late payment is a key driver of cashflow problems. In 2018, The Federation of Small Businesses (FSB) found that more than a third of small suppliers had seen their payment terms increase over the previous 2 years, suffering from what the FSB describes as “supply chain bullying”.1

In the same research, the FSB reported that 12% of SMEs had been asked for a discount for prompt

payment, 7% for retrospective discounting, 6% for a fee to remain on a suppliers list and 3% had a discount applied after goods and services had been supplied.

Data from Small Business Insights, Xero’s monthly snapshot of the health of the small business economy, shows that invoices with 30-day terms take an average of 39 days to be paid.2

The impact of late payments costs smaller business more than £2billion a year.3 Research by BACS Payment Schemes Limited found:

• 34% of SME business owners who experience late payments say they rely on overdrafts to help them meet their monthly obligations.

• 43% of SMEs spend a combined £4.4 billion on administration costs chasing late payments.

• 11% of SMEs struggling with overdue invoices seek outside help to chase up payments.

Late payments can also reduce SME investment in staff recruitment and training, innovation, new technology and processes. Late paying customers can also impact a firm's financial risk profile and inhibit its ability to borrow from banks, further stifling ambition and growth.

At Shaw & Co we support many businesses when cash flow becomes an issue. This guide highlights some of the most common cashflow problems we see and offers pragmatic guidance on what you can do to safeguard your financial resources. You’ll also find real life examples of how Shaw & Co has helped owner managers to successfully overcome their cashflow problems.

One final point. Even if your cashflow is healthy, keep hold of this guide because one day it may come in handy.

Over four-fifths of small businesses are estimated to fail due to poor cash flow. This guide highlights the most common causes and provides practical advice on how to address them. You’ll also find real-life examples of how we’ve helped owner managers to overcome cashflow problems.

1 Federation of Small Businesses, Chain Reaction: Improving the Supply Chain Experience for Smaller Firms, (June 2018), p 47.2 https://www.xero.com/uk/resources/small-business-insights/3 https://www.independent.co.uk/news/business/news/late-payments-uk-business-cost-sme-2-billion-a-year-bacs-payment-customers-a7846781.html

3 8 25Economicshock

7 22Financial distress

6 19Inappropriate capital structure

5 16Short term capital to fund growth

4 13Turnover underperforming forecast

3 10Overtrading

2 07Regular working capital shortage

04Temporary cash shortage1

The eight most common causes of cash flow problems, ranked in order of difficulty to solve.

This guide will help you spot the warning signs and learn more about how to overcome each type of cashflow problem.

Temporary cash shortage This is the most common type of cash flow problem. Fixing it requires due diligence and remedial action.

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What causes temporary cash shortages?Nearly all businesses experience cash flow problems at one time or another. And when they happen, you need to act quickly or risk them damaging your longer-term performance.

Temporary cash flow problems can happen for a variety of reasons, including your customers being unable to pay you due to insolvency, seasonal fluctuations in demand for your products or services, unexpected costs caused by plant and machinery breakages or increased input costs such as materials, labour or other overheads.

If you do not have adequate cash reserves to weather a short-term cash emergency, or have not planned how to run your business during such a period, you may struggle to maintain a healthy cash flow for the longer term.

A temporary cash flow issue may also indicate an underlying problem in your business that, if not resolved, could bring it to a shuddering halt.

The good news is that cash shortages are often a temporary blip, with no detrimental impact on the long-term viability of your business. However, when you are faced with a cash shortage, you need to act fast and take control.

What are the key indicators?The following financial indicators can help you monitor your cash flow, enabling you to spot warning signs and prevent any long-term damage to your business:

• Debtor book receipts versus expectations/invoice terms.

• Items payable versus expectations/standard terms.

• Weekly cash balances vs projections/headroom.

When faced with a temporary shortage of cash, these are the key steps that key stakeholders within your business should take:

Role of the MD/CEOThe MD/CEO needs to take control of the emerging situation by:

• Fully understanding the issue by carrying out root cause analysis.

• Making sure that the issue is a one-off by putting in place procedures to prevent it happening again.

• Working closely with the FD on projecting and monitoring the weekly near-term cashflows.

• Working with the FD and other business units on coordinating the remedial action plan. Instigating daily huddles and deploying a ‘plan, do & review’ process to fix the problem.

Role of the FDThe FD needs to take responsibility for identifying internal and external solutions to mitigate the short-term deficiency in cash flow by:

• Monitoring cash balances and daily/weekly projections to maximise visibility and flag problems early.

• Identifying internal solutions which may include: selecting debtor-customers for an early pay discount offer; agreeing monthly versus quarterly rent payments to alleviate pressure; considering reverse factoring solutions on payables to suppliers; and investigating potential delays to capex expenditure.

• Identifying external solutions such as increasing the bank overdraft, raising a shareholder loan, considering sale-and-leaseback of company assets such as property or equipment, and exploring if the company insurance covers the specific shock.

Role of Ops/SalesThe Sales and operations teams need to support the MD and FD by:

• Carrying out the remedial plan.

• Pivoting to a near-term payment strategy to speed up cashflow receipts on current jobs or projects.

• Identifying if automation or process redesign will enable resources to be deployed elsewhere to increase value.

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Established in 2014 by Mark Harvey, Acacia Associates is a building surveying company working for a range of private and commercial clients including homebuyers, insurers and housing developers.

In April 2020, COVID-19 brought the property market to a standstill with an immediate impact on Acacia’s operations and cashflow. As construction sites closed due to social distancing, Acacia was unable to reach an

agreed contractual milestone. As a result, a milestone payment was delayed, restricting vital cashflow into the business.

With our support, Acacia applied to the Coronavirus Business Interruption Loan Scheme (CBILS). The Royal Bank of Scotland approved a £160k loan allowing Acacia to continue meeting its contractual obligations, achieve key milestones and return to a near normal level of trading.

Key points The best solution normally reflects the nature of the problem.

If the temporary cash shortages cannot be alleviated through faster revenue receipts or slower cash outflows, a temporary overdraft or short-term loan is often the most viable solution.

If you can convince yourself that the problem is purely temporary, you should also be able to convince third parties.

Case study: Acacia Associates

Regular working capital shortageThis problem can affect a company's longer-term investment effectiveness and its ability to meet short-term liabilities.

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What causes regular working capital shortage?When a business has more current liabilities than current assets, it has negative working capital. And when this happens it may struggle to stay afloat during tough economic times or fund growth projects.

A number of factors can make your working capital go negative, including production bottlenecks in manufacturing creating longer delivery times, increases in raw material and labour costs, or if the delivery of goods or services is faster than receipts of revenues. Another common cause is succumbing to pricing pressure from customers or competitors.

If your working capital is negative for an extended period, it usually indicates that your business is struggling to make ends meet. This may force you to rely on borrowing or equity issuances to finance your working capital.

If you do not have adequate cash reserves to weather a short-term cash emergency, or have not planned on how to run your business during such a period, you may struggle to maintain a healthy cashflow in the longer term.

Working capital can serve as an indicator of how a company is operating. When there is too much working capital, more funds are tied up in daily operations, signalling the company is being too conservative with its finances. Conversely, when there is too little working capital, less money is devoted to daily operations—a warning sign that the company is being too aggressive with its finances.

What are the key indicators?The following financial indicators can help you monitor your working capital, enabling you to spot warning signs and prevent any long-term damage to your business:

• Limited cash availability or evidence of habitual overdraft borrowing.

• Increasing debtor days or reducing creditor days.

• Heightened levels of stock and work in progress (WIP).

When faced with a regular working capital shortage, these are the steps that key stakeholders within your business should take:

Role of the MD/CEOThe MD needs to take control of the emerging situation by:

• Holding emergency Board meetings to review likely causes.

• Reviewing existing KPIs to evaluate appropriateness.

• Revisiting business funding lines and assessing whether these remain fit for purpose.

Role of the FDThe FD needs to take responsibility for identifying internal and external solutions to mitigate the short-term deficiency in cash flow by:

• Reviewing pricing policy and adjusting where appropriate.

• Tracking collection time with customers to identify which are slow payers.

• Negotiating better creditor terms and focusing on timely debt collection.

• Reviewing stock levels and production efficiencies.

• Considering options such as seeking an increased overdraft, recapitalising the business and shareholder support or leasing.

Role of Ops/SalesThe Sales and Operations teams need to support the MD and FD by:

• Assisting the MD/FD in reviewing and addressing the above issues.

• Reporting on pricing policy and the capacity for the market to accept price/rate increases.

• Ensuring the production process is running as efficiently as possible.

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Following an MBO, a fast growing recruitment consultancy started seeing its turnover underperform its forecast and operational costs exceeding estimates. This left it in a state of persistent working capital shortages and a potential covenant breach with its bank.

We were approached by the business to help bring its worsening cash flow situation under control. We supported the client by

reforecasting its future performance numbers. We also negotiated with its lender an extension of the amortisation term by an additional two years.

Our intervention made the annual cash flow burden of debt service much easier for our client to manage. The business was able to continue on its growth trajectory and is performing well.

Key points Review your existing funding lines to see if they are still relevant. For example, have you utilised working capital lines for capex or investment purposes?

Consider how funding lines can be reorganised to create sufficient headroom.

Conduct cashflow modelling to determine the long-term working capital needs of your business.

Case study: Anonymous

OvertradingWhen a company expands too quickly without having the right financial resources in place it risks overtrading, which can lead to business failure.

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What causes overtrading?Overtrading happens when a company takes on more business than its resources can support.

Many business owners spend time worrying about not being able to attract enough work as opposed to taking on too much. When a large order comes in or sales start taking off, there is usually cause for celebration. However, fulfilling increased order levels without the right level of resources may become impossible. Failing to plan for this uptick can catch many businesses off guard.

One of the dangers of overtrading is that productivity, morale and the quality of goods or services delivered can suffer. Employees may be overstretched by working longer hours to fulfil orders. When absence strikes – whether through illness or holidays – corners may be cut to rush orders through. This may result in a reduction in the quality of goods and impede repeat business or extend customer waiting times.

Businesses with a small number of high-value orders need to consider the impact of a customer failing to pay on time. The consequences of being forced to take on additional staff or acquire additional resources to meet demand also need careful consideration. This could leave large overheads when demand slows down. So it is vital that you plan for all eventualities.

What are the key indicators?The following financial indicators can help you identify if you are overtrading, enabling you to spot warning signs and prevent any long-term damage to your business:

• Significant growth in sales/receivables.

• Increase in debtor days.

• Growth in your cost base.

• Creditor days.

• Number and sum of short-term credit lines.

• Frequent cash shortages.

• Late supplier payments and debtor receipts.

When faced with a business that is overtrading, these are the steps that key stakeholders within your business should take:


• Establishing the root cause for overtrading.

• Ensuring resources and capital levels are adequate to support additional incoming business.

• Making sure the sales pipeline is accurate and visible across the organisation.

• Deciding whether the profit margin on extra business is sufficiently attractive to justify the risks of taking it on.

Role of the FDThe FD needs to take responsibility for identifying internal and external solutions to protect cash flow by:

• Establishing the impact of additional business on projected cash flow, stock balances, payables and receivables.

• Identifying if prompt invoicing, modified contract terms or discounting could help manage faster cash receipts.

• Negotiating existing supplier arrangements such as higher volume discounts or better payment terms.

• Identifying if an external capital solution is required, for example reverse factoring, term loan, leasing or equity.


• Identifying opportunities for customer down payments to cover risks or fixed costs.

• Ensuring customer payment schedules have clearly defined milestones for billing and sufficient granularity of payments to reflect value delivery.

• Improving the overall efficiency of the existing process design and resource planning through transformation projects.

• Speeding up billing milestones on existing jobs.

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Dunton Environmental solve complex ground problems in the construction and land development industry including soil and water treatment, contaminated land assessments and waste management solutions.

In October 2019, after two years of rapid growth, Dunton’s working capital came under pressure from weather-related delays and customer billing issues. Dunton was also highly concentrated on onsite remediation for the

construction sector and needed to diversify into off-site solutions where the company could attract new customers in other industries.

We arranged a £1.7m, eight-year cashflow loan to cover Dunton’s additional working capital requirements while payments from key clients normalised. The funds also allowed the company to continue its diversification plan and other key projects such as refurbishment of the new Head Office.

Key points Always check if the capital within your business is sufficient and aligned to growth needs.

If organic capital and cash flow efficiencies are already maximised, explore external working capital solutions. These may include expediting revenue cash receipts, reverse factoring to elongate supplier payments and stock loans to reduce cash drain.

Always seek out the most cost-effective or flexible capital solutions to support your growth requirements. But always check what covenants, security or compliance requirements these involve.

Case study: Dunton Environmental

Turnover underperforming forecastCreating accurate revenue and growth forecasts can be tricky. But getting it wrong can lead to cash flow problems and difficulty raising funds.

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What causes forecast under-performance?Revenue and growth forecasts are vital for determining what you can afford to do and showing investors what you need in order to get to where you want to be. Forecasts also help you avoid the cash flow shortages that can hinder your business performance.

Forecasting allows you to determine what your estimated sales will be for a given time period. The forecast is generated from an analysis of previous data about your sales, the sale of similar products by your competitors, and market response to your offerings.

However, many business owners can easily get it wrong when trying to build a sales forecast. Being overly ambitious is a common mistake. Another mistake we regularly see is a failure to regularly update forecasts to reflect market shifts and what your competitors are doing in areas such as product development.

Also crucial to accurate forecasting is having a predictable sales and marketing process in place for finding, converting and growing sales from customers. Having a systemic process will provide useful data in how your sales teams are converting opportunities into cash. It can be all too easy to offer excessive discounts to achieve sales targets, which may compound cash flow shortages.

What are the key indicators?The following financial indicators can help you identify if turnover is underperforming forecast, enabling you to spot warning signs and prevent any long-term damage to your business:

• Actual versus budget sales figures.

• Reducing gross margin.

• Customer attrition rates.

• Reduced orders levels from regular customers.

• Deferred (but not lost) sales.

• Reduced market share.

When faced with turnover that is underperforming forecast, these are the steps that key stakeholders within your business should take:


• Reviewing sales performance with the sales team.

• Reassessing the achievability of original forecasts.

• Speaking to key customers to ascertain reasons for reduced order levels.

• Sounding out key employees on their opinion of sales underperformance and any suggestions to restore sales levels.


• Working closely with the MD to undertake root cause analysis for the under-performance.

• Preparing a recalibrated forecast with realistic and achievable numbers supported by full buy-in from the sales team.

• Closer interaction and communication with the sales team.


• Reconsidering what sales numbers are realistically achievable with the resources available.

• Contacting all regular clients to gauge future order levels.

• Assisting in the preparation of bottom-up reforecasting.

• Ensuring that there are no manufacturing or production bottlenecks which might hamper sales by preventing finished products being ready at the right time.

• Ensuring the sales proposition remains relevant and competitive in the market and adjusting if required.

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"If turnover is not achieving your projected numbers, it’s not the end of the world. The first thing to do is understand the cause of the problem.

When a business is part of a supply chain, a shortfall in turnover is often caused by delayed orders. This is a common problem and it is generally straightforward to acquire the working capital to resolve the issue.

However, the shortfall may be due to a sales and marketing function with overly ambitious targets or a proposition that no longer meets market need. The issue then becomes internally focused and you’ll need to revisit your forecasting process, pricing policies and re-evaluating the proposition. Have a robust dialogue with your sales function to validate assumptions and ensure that forecasts are realistic and achievable."

Key points Conduct root cause analysis to understand the probable causes for under-performance and formulate a turnaround strategy.

Challenge all forecast assumptions based on historic experience of client order levels and sales performance.

Consider developing new markets, customers, or your proposition.

Review your product pricing structure and compare against your competition. Assess whether you are charging enough or too little.Expert opinion - Colin Burns

Short term capital to fund growth Using short-term capital to fund long-term growth can lead to cash flow problems and hinder your growth plans.

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Short-term capital to fund long-term growthA lack of cash or financial expertise could see you using short-term facilities - such as an overdraft - to fund your long-term growth.

This is a habit you need to break, because this approach is fraught with risk and typically indicates poor financial management or a lack of assets to support long-term debt financing.

Businesses that are overtrading typically fund growth by using short term capital such as overdrafts which often have low credit limits, further constraining growth. The key point is that you need to choose the right form of capital to power that growth.

What are the key indicators?The following financial indicators can help you identify if your business is using short-term capital to fund long-term growth:

• Regular overdraft usage and/or lack of cash.

• Rising trade creditors or increasing creditor days.

• Over reliance on factoring, that is, using invoice discounting facilities as opposed to long term debt, or the absence of structured finance in the balance sheet.

• Deferring supplier payments and increasing creditor days.

• Late debtor receipts and not managing debtor days.

• Growth in overheads, particularly increasing fixed overheads which are difficult to manage in a downturn.

When faced with these indicators, these are the steps that key stakeholders within your business should take:


• Understanding the risks of funding long-term growth as opposed to using short-term facilities.

• Forming banking relationships which are supportive of the business over the long term.

• Considering more than one provider of finance through, for example, multi-banking and securing finance from different sources to mitigate risk.


• Providing detailed forecasts of trading activity and accurate assessment of the order pipeline.

• Working with Sales/Ops to understand the macroenvironment and flexing the forecasts based on different trading scenarios.

• Negotiating better creditor terms and focusing on timely debtor collection.

• Regularly reviewing bank and alternative funding solutions.

• Managing stock levels and ensuring the efficiency of stock control.

• Constantly reviewing the pricing policies.


• Reinforcing contractual terms with clients and regularly communicating with finance to optimise cash collection such as milestone payments.

• Ensuring that the business has sufficient working capital facilities before entering into new contracts.

• Bringing invoicing forward on milestone payments to assist working capital pressures.

• Communicating with the FD on any production issues, pricing and capacity.

• Ensuring that there are no manufacturing or production bottlenecks which might hamper sales by preventing finished products being delivered at the right time.

• Making sure that the sales proposition remains relevant and competitive in the market and adjusting if required.

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"I often see owner-managers using overdrafts or short-term funding to fund long term projects or having just one provider for their financing needs.

This is a risky game to play especially if you consider the consequences of the finance partner going out of business or lack lending appetite.

Unfortunately, many SMEs lack sufficient experience in funding decisions to make the right financing decisions.

My advice to any owner-manager is to form relationships with multiple financing sources that are supportive of your business and its goals. This approach will help you mitigate risk to ensure the long-term viability of the business you have grown."

Key points Ensure that there is an appropriate balance between long and short-term funding to support your business and its growth.

Validate what security, such as personal guarantees, your business is prepared to provide to obtain facilities.

Validate what security, such as personal guarantees, your business is prepared to provide to obtain facilities.

Minimise any financing costs.

Ensure that your business is not over-leveraged and manage your balance sheet to prevent a lack of capital that could put pressure on your business and its growth ambitions.

Expert opinion - Rick Martignetti

Inappropriate capital structure An inappropriate capital structure means that you are using the wrong methods to fund your business, which can create major obstacles ahead.

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What causes an inappropriate capital structure?Using the wrong capitalisation structure can severely impede your operations and stifle growth ambitions.

Capital structure is the proportion of debt and equity used by a company to finance its operations and growth. It includes short-term debt, long-term debt and common stock.

Debt consists of borrowed money that is paid back to the lender (typically with interest), whereas equity consists of ownership rights in the company, without the need to pay back any investment.

When financing any growth project, it is important to use the appropriate funding facility. Having an imbalanced capital structure could lead to the business struggling to make debt repayments, accessing capital investment, or not yielding the required equity expected by shareholders.

What are the key indicators?The following financial indicators can help you identify if your business has an inappropriate capital structure, allowing you to spot warning signs and prevent any long-term damage:

• Debt/equity imbalance (excessive gearing) creating unforeseen creditor and counterparty issues.

• An increase in retained losses.

• Excessive dividend extraction which is depleting reserves.

• Unrecognised revaluation reserves.

• Insufficient cashflow generation to service debt, resulting in covenant breaches.

When faced with an inappropriate capital structure, these are the steps that key stakeholders within your business should take:


• Reviewing with the FD the current balance sheet to identify key structural issues.

• Assessing existing funding documentation to establish your options and understand the penalties which a lender might impose.

• Identifying whether there is scope to improve cash collection. For example, has there been a change in creditor payment terms or lax debtor control?

• Evaluating dividend levels and their appropriateness in current circumstances.


• Assisting the MD with data gathering and root cause analysis.

• Reassessing current cash flow to see if there is scope for improvement.

• Identifying whether there are any undervalued assets which could improve reserves.

• Preparing a summary of all financial instruments for internal review and to fully understand what risks the business is likely to face.


• Expediting delivery of long-term projects to minimise cash flow pressure.

• Maintaining strong sales and marketing efforts to drive demand for products or services to boost revenue.

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EnSilica is a leading designer of application specific integrated circuits (ASIC) for OEMs and system houses. The company has world- class expertise in supplying custom analog, mixed signal and digital integrated circuits to its international customers in the automotive, industrial, healthcare and consumer markets.

As part of its long-term strategy, EnSilica needed to address its capital structure to one

that would allow it to execute the next part of its strategic plan.

With our support, EnSilica secured an eight- year fixed rate loan facility, which is totally unsecured and does not require any equity dilution. This provided optimal capital support for EnSilica’s business strategy, which includes developing new products and increasing headcount.

Case study: Ensilica UK

Key points Consider whether this is a short-term issue or a fundamental balance sheet problem that needs to be resolved.

Consider how to approach affected parties and the basis on which their support should be sought.

Review whether there is scope to restructure your debt stack to reduce

reliance on cash generation.

Consider equity raising options.

Financial distressA company in financial distress is unable to generate enough revenue to pay its financial obligations. Ignore the signs and you could face bankruptcy.77

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What causes financial distress?Several factors can lead to financial distress, including company underperformance, high fixed costs, competitor disruption or a downturn in the economy. And when this happens, it can be all too easy to bury your head in the sand and hope the problem will solve itself.

A company may face financial distress of its own making. It may employ unproductive employees, run high capital projects at the wrong time, take on expensive financing costs or simply have a poor sales and marketing strategy.

Companies may also become financially distressed due to external market forces. For example, disruptive competitors offering better products or services at lower prices. An economic downturn – such as the Covid-19 crisis – is even more likely to bring financial distress.

Distressed businesses will typically see their sales rapidly decline and find suppliers offering less favourable terms. It may become harder to secure financing and employees may suffer from lower levels of morale.

Left untreated, a company in financial distress faces a high probability of bankruptcy. So why risk losing a business that you have put everything into growing?

What are the key indicators?The following financial indicators can help you identify if you are in financial distress, enabling you to spot warning signs and prevent any long-term damage to your business:

• Increasing number of unpaid invoices.

• Lower revenues, increased costs, lower margins.

• Declining gross profit margin and operating profit margin.

• Changes in gearing/leverage and debt/asset cover ratios.

• Changes in CFADS (Cash Flow Available for Debt Service).

When faced with a business in financial distress, these are the steps that key stakeholders within your business should take:


• Validating whether the business can realistically meet debt payments on time.

• Conducting root cause analysis as to which variables have changed since debt was taken out.

• Understanding if the problem is marginal or temporary and if the situation is worsening or improving.

• Evaluating if the problem is due to insufficient

growth or over forecasting.

• Validating whether the business would remain viable given a different capital structure.


• Regularly monitoring and analysing KPI performance against forecasts and reporting this to the MD.

• Identifying key trends and flagging problems early to enable remedial actions.

• Reforecasting based on current and emerging trends to assess how quickly the business could face serious problems.


• Working with the MD / FD to implement remedial actions for performance improvement.

• Reprioritising high capital activities in favour of more profitable ones.

• Evaluating marketing strategy and developing the proposition to make it more competitive.

• Identifying cost cutting opportunities across the organisation.

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A supplier of IT software and hardware to the education section had an unbalanced capital structure. It had a high number of short-term borrowings (repayable over 6–24 months) which were funding assets over a four-to-five-year period.

Whilst the company was very successful at generating new business, persistent and unremedied capital shortages meant several creditor payments were being delayed. One

creditor petitioned for a court sanctioned administration to recover debt. The owners of the company were removed from the company with the administrator managing the business for the benefit of the creditors.

Unfortunately, the company approached us too late and we were unable to support them through their cash flow problems. This case highlights the risks of failing to address cash flow issues.

Case study: Anonymous

Key points If the core business remains viable, identify what capital structure the business could support with its current assets and profitability.

Evaluate if the gap can be bridged with current capital providers through collaborative restructuring.

Identify if the business can be refinanced by a more suitable capital structure.

If the core business is viable but over leveraged, evaluate what recapitalisation options are available and the impact each has on existing debt repayment and owners’ equity.

Evaluate whether the situation requires pure debt restructuring or if major operational changes will also be needed.

Economic shockAn economic shock is an unpredictable event that has a significant impact on the economy. These can be hugely disruptive to businesses and their cash flow.

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What is an economic shock?Covid-19 is the most recent and significant example of an economic shock. As governments around the world introduced public health measures to stop the spread of the virus, the flow of goods and people was rapidly constricted. This led to many businesses temporarily closing and economies stalling.

Businesses may face other types of economic shocks. Supply shocks are events that make production across the economy more difficult or costly due to rising costs of commodities.

Demand shocks happen when there is a significant shift in the patterns of consumer behaviour.

Policy shocks are changes in government fiscal policy that have a profound impact on consumer spending.

Any type of shock – whether macroeconomic or sector focused – is difficult to predict and can be highly disruptive to cash flow.

General prudence, including having 'rainy-day' cash reserves and facilities to draw on will leave you better placed to survive a prolonged period of uncertainty.

But for those businesses that are not well prepared for a shock may find their long-term viability under threat.

What are the key indicators?The following indicators can help you establish if you are vulnerable to an economic or sector shock:

• A lack of funding options. The recent coronavirus pandemic has led to banks being used by governments to distribute emergency loans such as Bounce Back loans, CBILS, and CLBILS. This illustrates how, without government intervention, economic shocks can cause credit squeezes that may threaten the viability of your business.

• A company being managed out of a business banking unit rather than having a relationship manager. In times of economic shock this can cause acute challenges for a business.

• A lack of contact or interaction from their bank.

When faced with an economic or sector shock, these are the steps that key stakeholders within your business should take:


• Conducting a SWOT analysis to evaluate the impact of macroeconomic factors on the business.

• Evaluating flex budgets by taking into the account the current or oncoming shock.

• Exploring options to mitigate the impacts of the shock on the business.


• Ensuring sufficient facilities are in place to provide headroom in the event of a shock.

• Assessing flexed budgets in relation to the shock and reviewing what facilities are needed.

• Maintaining and building sufficient banking relationships to support the company.

• Maintaining multiple banking and other funding relationships.


• Constantly reviewing and amending trading terms, contracts and operational activities.

• Ensuring that the business adapts to the shock and is correctly positioned to take advantage of any new opportunities it may present.

• Operating collaboratively with the finance and sales &marketing functions to mitigate the impacts of the shock.

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Fundamentals Ltd is the leading manufacturer of voltage control solutions for the UK’s Power Grid. Its global client base includes power generation, transmission, distribution, industrial and private networks.

As a result of COVID-19, the company experienced significant interruption to its sales and a slowing down of payments by some of its customers. Despite this slowdown, Fundamentals wanted to continue to invest

in its employees and the company’s future development.

Fundamentals’ owners sought our support for help in applying to the Coronavirus Business Interruption Loan Scheme (CBILS) for emergency funding. With our help, Lloyds Bank approved a £2m loan, enabling Fundamentals to maintain its strong UK presence and core product and service offering.

Key points Evaluate whether your capital structure could withstand a shock.

Ensure that your existing facilities provide sufficient headroom to withstand a shock and that your business is not overleveraged.

Manage your balance sheet to prevent a lack of capital placing pressure on your business and its growth ambitions.

Case study: Fundamentals Ltd

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"We hope you have found this guide valuable. If you’ve picked up one thing from reading it, we hope it’s the need for the MD, FD and Sales & Operations teams to work collaboratively when faced with a cash flow crisis. Please get in touch with me or my team if you’d like to discuss any of the issues raised in this guide."

Alexei GaranAlexei Garan, Head of Debt Advisory

Colin Burns, Director Rick Martignetti, Associate

+44 (0)117 325 [email protected]

22–24 Queen SquareBristol BS1 4ND

@ShawCoLLP

Shaw & Co

shawllp.co.uk

Revision 1.0 Copyright Shaw & Co 2020

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