Shape Your Business logo
Follow Us:

Warning signs for a cash flow tsunami

Thursday, December 10, 2009   By Mike Reddy

 

Cash flow problems are a common enough experience, but many businesses fail to acknowledge that there is a full blown cash crisis looming on the horizon.

Like the tsunamis we seem to be hearing about more frequently in the last few years, often the disaster is compounded by the fact that people fail to read the signs and don’t take prompt steps to avoid catastrophe. Unlike the less fortunate tsunami victims, the warning signs for your business can usually be read in sufficient time to act upon before it sinks between the tidal wave of creditors and mounting debt.

The two main causes of cash flow difficulties are business growth and working capital disruptions.



Even a profitable business can have cash flow troubles. A big uptake in sales can mean a sudden gap between the funds going out to meet the demand for goods and services and the payments coming in.

Most worrying though is the situation when the company's receivables are actually less than its payables. If the business is running at a deficit unless there's a new infusion of cash, a significant increase in sales, or a reduction in expenses, the company risks collapsing.

The key thing to remember is that the underlying cause of cash flow problems is the need to pay creditors sooner than debtors are paying you.

Whichever the cause of the cash flow issues in your business, you need to monitor constantly and watching for the warning signs of impending problems.

Here are some of the warning signs to watch for:
  • Sales are slowing. Your regulars are reducing on frequency and amount of expenditure with you. Success rates with winning new custom are declining.
  • Bank balances are shrinking. Perhaps you had the slack in the past to handle the situation when receivables were slow coming in, but now your balances are lower than usual, and show little sign of improving.
  • Inventory turnover is sluggish, and so it is not generating profit.
  • You are falling behind in paying your invoices. Businesses generally pay employees first, and suppliers to ensure orders can be filled, but they might postpone paying statutory fees because this will not prevent them doing business in the short term. Once a business starts stretching its trade creditors beyond normal terms then its cash flow problem is usually quite serious.
  • Lack of funds is impacting on your capacity to replenish necessary inventory or preventing major purchases, such as equipment or software.
  • Business loan creditors are becoming edgy. They call frequently and perhaps start wanting to see your current financials.

Run your cash flow budget forecasting regularly. Like the earthquake prediction centeres, it’s your early warning system. At the first sign of problems take prompt steps to reduce the outflow of money and increase monies coming in. There's always something you can do to move your business to safer high ground.

Running regular financial forecasting against your business budget is the vital first step in the process. Analyze your end-of-month or even weekly financials comparing the actuals with your budget to see where you are performing well and where there are shortfalls.

The early warning signs of potential cash flow problems do vary across different industries, as do the solutions. Talk to your accountant /business advisor if you need assistance in structuring a business plan that allows for proper forecasting and contingency planning. And you shouldn’t hesitate to contact them early if you need help and ideas for managing the situation to ensure your business stays afloat.


Mike Reddy is a Chartered Accountant, business coach and advisor helping businesses in Sydney, Melbourne, Brisbane and Gold Coast to easily increase their profits and cash flow. He is currently President of the North Sydney Chamber of Commerce, a Regional Councillor for Sydney North East and a member of the Institute of Chartered Accountants Sydney leadership team. As well as advising businesses, Mike presents business development seminars and webinars and is regularly contacted by the media to comment on small business matters. You can connect with him on Facebook, Twitter and Google+.