Banana Blog Image

How to spot the warning signs of cash flow issues in your business

There is nothing more important in business than surviving to fight another day.

We all have periods of success and growth and lean times where business is stagnant or declines. The most important thing we as business owners can do in the tough spells is give ourselves time to correct the situation. To do that and continue trading we have to be able to spot the warning signs to ensure we can take the right corrective action. Businesses can survive most things, but running out of cash is the one situation most likely to prove fatal.

Sensing the early signs

It’s often the case that cash flow issues aren’t sudden occurrences, they are the result of trends that, in the early stages might not ring any obvious alarm bells. Many directors who have been through those struggles realise with hindsight that there was a feeling in the back of their mind for some time that things weren’t right and they wish they’d paid more attention to it earlier. Here are some examples.

Edging towards over-extension

If you have short or medium term liabilities are they generally increasing? They may not be at a dangerous level yet, but it’s worth thinking about whether you’re making decisions about debt differently now than previously.

Banking on landing the big one

Healthy businesses have steady revenue. Has that situation changed in your business whereby you’re now more reliant on the big wins? If so it’s worth being really honest with yourself about associated risks whether you can do anything to minimise it.

Spending all day on finance

All areas of your business need some of your time. Do you find you’re spending more time with your book-keeper than with your operational staff? Why is that?

Being lulled into over-trading

Lots of sales are good, right? It’s a nice problem to have, surely? Not if the associated payables are mounting up and the receivables aren’t coming in. No business owner wants to put a dampener on a successful sales team and risk morale, but that doesn’t mean you can always allow success to be limitless.

The cold, hard facts

At your monthly board meeting, the directors should all have the latest management accounts to hand. The numbers are right there, but it takes collective will and discipline to analyse them honestly. That starts by ensuring you have the KPIs that matter or adding them if not. Here are some key areas to pay attention to:

Debtor Days – If your standard payment terms are 30 days you need to know if customers are starting to slip beyond that and why.

Operating cash flow – To be clear, this is not the current bank balance. It’s crucial to be sure whether you are in a positive or negative situation and, if the latter, that you are making plans to reverse the trend before you exhaust your reserves.

Early payment discount totals – A key indicator of healthy cashflow is the ability to sometimes pick up discounts for early payment, where available. If you have that figure to hand and it’s reducing or has been zero for some time, what’s going on?

If you see the warning signs, what should you do?

  • Review how you can minimise your costs and overheads

This could be as simple as reducing such costs as entertainment, subsistence, travelling, cleaning, recycling, wastage etc…

  • Reduce stock

Review stock holding and ordering levels – are you holding too much stock for demand? If so you might consider offering bulk order sale discounts or offer sale discounts for old stock which would otherwise be written off as obsolete in time.

  • Agree extended terms of credit with suppliers

Proactive discussions with suppliers are always easier than reactive ones after you’ve breached agreed terms.

  • Maximise sales volumes and margins

By reviewing pricing versus demand and ensuring your sales teams focus on the type of sales that are going to help the situation, not just any sales at any price.

If you’d like to understand more detail about how you can take control of your cash flow management, I’ve produced a free e-book packed with useful tips for business owners on how to understand the subject and plan better. I also welcome the chance to talk to business owners about the subject and help in any way I can. I run a Business Finance Club based in Dorset which meets on a monthly basis and is a friendly forum for business owners and accounting professionals to share knowledge. You’d be most welcome to join us.

Alternatively if you’d just like to chat on a 1-1 basis then my door is always open.

Download your free “The Importance of Cash Flow Forecasting and Management” E-book

Reserve your place at the next Business Finance Club event