Five warning signs that a business is headed for cash flow problems

Cash flow, which looks at the amount of money the business has coming in an out at any given time rather than at the theoretical profitability at the year end, is often regarded as the biggest killer of growing businesses.

Original post by Mortgage Business / Steven Furman

If a business turns a profit at the end of each year, the business must be safe, right? If you ask most small and medium business owners, they will tend to say yes. However, the profit & loss account is not the only place that problems can be brewing, as TIM Finance executive director, Steven Furman, explains.

Many profitable businesses get into serious financial difficulties because of another metric - cash flow. Cash flow, which looks at the amount of money the business has coming in an out at any given time rather than at the theoretical profitability at the year end, is often regarded as the biggest killer of growing businesses.

On the other hand, cash flow isn’t necessarily something to fear. If business owners plan and manage their business carefully, it can be used to their advantage as a very effective form of business funding.

The main thing with cash flow is that one can’t ignore it. When speaking to clients about the possible funding requirements for their business, it is very useful to cover off these five warning signs to help them stay on the straight and narrow.

  1. Do their customers always pay late

While this does not necessarily mean that a business doesn’t have cash flow problems, it is certainly a sign that a business can get into danger. Ask the owner why they think their clients are paying late: are their invoicing promptly and clearly enough? Could the terms and conditions be stricter? If payment 45, 60 or even 90 days after receipt of an invoice is being forced on the business by bigger customers or is it the prevailing practice for the particular industry, the best solution may be to use invoice finance*.

  1. Does your client pay his/her own clients late

If your client is the one paying customers late, then they are not only part of the problem but may also be in trouble. If they can’t afford to pay for essential supplies on time this can damage supplier relations; hinder the ability to grow; and is indicative of a poor cash flow situation. One should address the root causes of these late payments and understand how and why the business has got into the situation it finds itself in. 

  1. The business already has a big overdraft or loan, but no investment is taking place

In an ideal world, SMEs only seek funding when they want to invest in something and expand. However, many businesses operate with a permanent overdraft, or service a non-bank loan just to ensure they have enough cash to pay their bills. If this is your client, they need to urgently review their cash flow bottle necks, understand what is causing this cash crunch and consider if debtor finance** might be a solution to this problem

  1. Every month your client is worried that they may be short on paying wages, but the money turns up

With a week to go until staff payday, do you get a panicked call from the financial controller or business owner expressing concern that he/she may not be able to wages for the month? Do you both frantically search through the accounts receivable, postpone a supplier payment, postpone an ATO payment or call the bank to extend the overdraft... and then it works out fine? Well, one day it won’t. This kind of behaviour is indicative of poor cash flow management – a business owner needs to always know if the bills will be covered. Often creating a simple monthly cash flow forecast spreadsheet for your client to monitor and update on a regular basis will quickly point to the root cause of the cash crunch and small simple changes then to how the business operates will often solve this problem and ease the ongoing concerns.

  1. Your client would love to get access to funds to invest in their business to expand but can’t get funding

This is a very common complaint among small business owners, and understandably so since bank lending criteria tightened significantly following the financial crisis. However, if the business is genuinely profitable and has a good growth plan, some form of cash flow funding should be available. You might be able to explain to your client that by leveraging their unpaid invoices sitting in their accounts receivables ledger will release funds into the business without the need to resort to a non-bank loan. Invoice finance can help unlock the money by getting cash up front, instead of waiting 30 to 90+ days for invoices to be paid.

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