Cash flow fluctuates, that’s a fact and it’s not a problem if you have solid cash flow management measures in place along with a clear understanding of how your business works. However, a business can reach a stage where a severe fluctuation is actually the sign of something more serious or it remains stuck in a trough.
I’ve helped many businesses with their day to day accounting, each one very different but all needing cash flow management. Here are 5 warning signs that have generally alerted me, at quite an early stage of an engagement, of a serious cash flow problem and deeper problems within a business:
The Business is Regularly Making Late/Missing Payments
Pushing out payments to suppliers is fairly common in cash flow management. But where I find a business is constantly missing payments to suppliers and running up more and more debts, then this tends to indicate a deeper issue within the business.
Generally speaking, a business should be making sufficient profits to covers its expenses so if customer payments are coming in. But suppliers cannot be paid then it’s worth investigating the true profitability of the business or whether there is something else draining the cash flow.
The Business is Constantly Stuck in Its Overdraft
An overdraft, by definition, is something a business dips in and out of to cover short term cash flow problems. However, a business that sits in its overdraft constantly can be one with a serious cash flow problem (and putting itself in danger of having that overdraft pulled by the bank and replaced by a loan to get it paid back).
The Business Owners Are Regularly Putting in Their Own Money to a Cash Flow Problem
It’s perfectly normal for a Director or Business Owner to put their own funds into a business perhaps at a start-up stage or at a point where the business is evolving and needs some kind of cash injection. What is a worry is where Directors are constantly putting funds to keep the business afloat. It can indicate that the business simply does not make enough money and this needs to be addressed because unless the owner has unlimited funds to put into the business it is a ticking time bomb. And when a business goes under the Directors/Owner will be last on the list to get any cash back out to repay what they have lent it.
The Business Owes More to Its Suppliers Than Owed By Customers
A business which owes more than it can collect from its customers (ie: a cash flow deficit) is basically illiquid. If there is no real plan to sort this out (borrowings, directors loans, major upcoming projects), then this is a sign of real cash flow & business problem.
The Business Owes Taxes
Depending on the level of taxes a business owes, seeing huge liabilities can worrying to find. Getting on the wrong side of HMRC is not a place you want to be, so a business ‘borrowing’ on its taxes to keep going is in a dangerous place especially if HMRC come knocking.
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