Please select your preferred region.
Please select your preferred region.

8 Cash Flow Red Flags You Shouldn’t Ignore

Published 22 Oct 2020
Updated 1 Sep 2022
6 min read
8 Cash Flow Red Flags You Shouldn't Ignore

8 cash flow red flags you shouldn’t ignore It’s not profit that makes or breaks small and medium businesses. It’s cash flow. The money coming in and going out. It’s sobering to think that 82% of small businesses fail due to poor cash flow, which is why cash flow is the true indicator of your business’s financial health. Profit will show you sales (including those customers haven’t paid for just yet) minus any costs of doing business. It won’t tell you if you have enough money in the bank to pay staff wages and bills on time – that is the job of a good cash flow forecast. So, what do you need to look out for to make sure your cash flow stays healthy? How can you avoid falling into negative cash flow and affecting the long-term survival of your business? Here are 8 cash flow red flags you shouldn’t ignore.

1. You can’t see your cash flow

Do you have the visibility you need to monitor your cash flow, see your payments easily and check up on your financial health? It is essential to be able to see your cash flow position up-to-the-minute with a cash flow forecast. You should review your profit and loss and cash flow regularly. That will put you in the best position to keep up with payments, have confidence in what’s coming in and spot any red flags early. Need help? Consider investing in an accounting software like Xero or Myob. Your business accountant or bookkeeper can also help you track and understand the numbers.

2. Profit is on the slide

We know that profit isn’t the best way to understand your business’s financial position. However, weakening profit is a warning sign that things aren’t quite on track. First, ask yourself if you really understand the full cost of a sale. Make sure you know all the hidden costs, track supplier price increases and review your prices regularly, so you don’t lose your profit margins. If your profits aren’t looking too hot, don’t despair. 2020 has been particularly hard on businesses and customer demand has changed. Examine your market more closely and consider changing or adapting the way you keep and attract new customers to lift your sales. You might need to consider switching suppliers if price increases are affecting your profit margin, or if products are no longer available. Most importantly, get to know your numbers so you can stay ahead of the challenges.

3. Debts are mounting

If you’ve had your eyes trained on profit margins, you might be surprised to see your bank account dwindling and debts mounting! Red flag! When you find yourself in negative cash flow – that is, the money going out of your business is greater than the money coming into your business – this can spell disaster. Check your cash flow forecast to better understand timing; when money comes in vs when it goes out. How can you close the gaps? Look at practical ways to follow up late payments and customer debts, and consider where you can cut back on expenses. The key is having cash to hand at all times; a cash reserve if you will, so you can pay your own bills on time. Ideally, you can make payments early and take advantage of things like early payment discounts to boost your profit margin.

4. Customers are slow to pay

How long are you waiting on customer payments? A significant cash flow problem for businesses is the lag between paying for materials and production and the time the customer pays for the finished product. Relying on a big payment from one client can be a risky approach. Even waiting on several smaller delayed payments is a big issue for small and medium businesses. Both of these delays can cause cash flow strain while you have bills and suppliers to pay, and services and products to provide to your customers. Keep an eye on customers who pay late, especially the repeat offenders. You’ll start to see this affecting your cash flow position, so you need to be proactive as soon as you notice an issue. You might be able to offer them discounts or other incentives for early payments. But remember to invoice on time, communicate often and keep focused on getting the cash into your account.

5. You’ve over-ordered stock

Holding stock costs money. There’s the cost of storage and moving stock around, but more to the point; the more money you have tied up in your inventory, the less you’ll have for essential payments like wages and supplier bills. So, before you buy in bulk to benefit from volume-based pricing and economies of scale, consider what this might do to the health of your cash flow. Demand planning is a fine balance; even the pros get it wrong, so don’t be too hard on yourself. Start by considering seasonal patterns that change customer demand across the business year. Ensure you have good visibility of what’s changing in your industry, and your own business, at all times so you can plan and respond accordingly. You might also like to engage the help of your accountant; many business accountants now offer demand planning support as part of their service. Alternatively, look into demand planning software like Intuendi.

6. Staff turnover is too high

If your front door is constantly revolving, you’re bound to be spending big dollars on recruitment, training and other incidentals like software access and uniforms. Staff turnover is a big expense, especially for a small business, so aim to retain your team. Think about ways to attract the right staff. Be clear about what you’re looking for in recruits so you can make sure they’re the right fit from the outset. They’ll need to have a certain level of skill to perform their job at an optimal level, as well as the right cultural makeup to mesh with your existing team. The interview process is critical; it needs to be well thought out and consistent so you can get an in-depth understanding of what your new hire can bring and understand what they’re looking for too. Software like our very own paperless onboarding can help set you on the right path. With the right staff in place, turn your focus to retention. Consider your workplace culture, employee benefits and incentives and establish formal check-ins with staff to monitor their performance and attitude. It’s really important to ensure staff feel valued and happy at work to reduce flight risk. Looking for more information on interviewing candidates?

๐Ÿ‘‰ Download our FREE interview checklist here. ๐Ÿ‘ˆ

7. You don’t have a finance fallback plan

Don’t wait until it’s too late to secure a finance fallback plan. You could find yourself on struggle street fast, and no one wants that! Having a healthy cash reserve to hand is a must, but this takes time. So while you’re building this, consider your commercial lending options. You’ve probably considered a standard business loan, or even a line of credit, but have you heard about invoice financing? Designed specifically to help businesses manage their cash flow, it’s a form of lending secured by your invoices that haven’t yet been paid. These are perfect for businesses that might be experiencing late payments. You might like to talk to a commercial finance broker, or your bank, about the options suitable to you and your business. Did we mention not to wait? The best time to put a finance fallback plan in place is when both your profit and cash flow are healthy!

8.You’re in a period of growth

We know what you’re thinking. Isn’t business growth a positive thing? Well, yes, absolutely. You should feel good about your growing business; you’ve put the hard work in, and you’re finally seeing results. The problem is that the more you grow, the more cash you need to keep your operations going and the harder it becomes to keep track of all your expenses. With increased staff, inventory and associated costs, you could find your cash flow sufferingโ€ฆfast. This is particularly true if you experience rapid growth due to the lag between when you need to pay your bills, and when your customers pay your invoices. When your business starts to grow, don’t sit back and relax just yet. Now is the time to get on top of your cash flow management and maintain that growth.

Become the king of your cash flow

Slow or inconsistent cash flow can be a killer for small businesses. When the money coming out of your business is more than the money coming into your business, you’ll feel the strain and it’s not a nice place to be. Be proactive and prevent issues from getting out of control, by ensuring you’re on the constant lookout for red flags.

Remember profit doesn’t necessarily mean cash in the bank, so it’s important to run your cash flow forecasts monthly. Chase timely payment of your invoices, keep your stock lean and look for ways to minimise outgoings. Ensure your staff are happy, productive, and feel valued, and before you celebrate big growth, check your bank account. Talk to your accountant or an advisor who understands your business well and find out what options you have to keep your cash flow going and your doors open. Time to show your cash flow who’s boss!

Want more? Download our HR Compliance Bundle.

Download now

The essential guide to HR compliance

Explore by industry