Managing Your Cash Flow

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Seven signs your cashflow is in trouble

4 Mins

1. Reduced or reducing turnover – against budget, against prior year, against previous months. In most businesses, sales levels are the key determinant of profitability and cash inflows.

2. Reduced or reducing gross margin – turnover may be holding up but it is important to know what your gross margins are for each major product or service, and what your mix of products or services sold is typically. Changes in individual margins (e.g. if material costs increase) or in mix (e.g. if lower margin products or services make up an increasing percentage of turnover) can also have a material impact on profitability and cashflow. 

3. Increases in fixed costs – this is an obvious one when it comes to cashflow. If fixed overheads do increase (against budget/prior year) and there is not a comparable increase in revenues, the inevitable impact is a reduction in profitability and cashflow.

4. Customers take longer to pay – often this will show as a gradual deterioration in the ageing of accounts receivable, or an increase in the incidence of bad debts. Whilst it is important to maintain a solid working relationship, a customer is only a customer when payment is made. It certainly pays (literally!) to keep a close eye on ageing and to act quickly on those accounts that fall overdue. 

5. Increasing time taken to pay supplies – this is the reverse of the point above and is often evidenced by increased calls or emails from suppliers chasing payment of overdue amounts. In many cases the company may have been forced to slow the rate of payment to suppliers as cashflows are reduced. As with customer payments, this can be detected by monitoring ageing – this time the ageing of accounts payable. Another sign to look for is the occurrence of late payment penalties or interest imposed by customers (assuming that the terms of business provide for this).

6. Increasing month end pressure – for many businesses payroll payments at the end of each month represent the single largest monthly cash outflow. Increasing pressure to ensure a business has adequate funds to meet this outflow is a sign that working capital is being stretched too thinly.

7. Overdue VAT or PAYE/NIC – both VAT and PAYE/NIC systems rely on businesses to collect the respective taxes and to pay them over to HMRC at specific points in time. Prior to payment, therefore, a business will have collected (VAT) or retained (employee PAYE/NIC) monies. Where cashflow is under pressure, businesses may find that on payment days the cash has been utilised elsewhere (e.g. supplier payments, payroll etc) and they are unable to pay some/all of the amounts due. Even if they subsequently ‘catch up’ in the following days/weeks, late payments are a clear sign that the cashflow of a business is being stretched.The single most important thing for a business to do is ensure there are processes in place for the early detection and ongoing monitoring of the signs above. The business can then determine, before it is too late, what remedial action is needed. Too often businesses miss the early signs and act only when the situation is more serious, at which point their options are often far more limited.

Paul Turner is an experienced finance director with My Business FD, which offers high-calibre finance directors to ambitious smaller and growing companies on a part time, flexible and affordable basis. Tel: 0207 717 5254 or enquiries@MyBusinessFD.com. 

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