Noticing the early warning signs of financial distress allows you to take action quickly, and potentially avoid insolvency. But when you’re caught up in day-to-day operational matters that constantly demand your attention, it can be difficult to recognise larger-scale issues.
Negative cash flow is typically the first sign that your business is struggling. In fact, this is a key problem as if insufficient cash is available to pay the bills, the business may not survive at all.
So what exactly should you look out for with regard to cash flow, and what other issues could indicate trouble ahead for your business?
Difficulty paying monthly bills on time
Hopefully, your business hasn’t reached the stage where it cannot afford to pay the bills as they fall due, as this is one of the signs of insolvency. If you’re ever worried that there won’t be enough cash to pay employees, suppliers, utilities or other regular creditors, it’s a sure sign the company is experiencing financial distress.
The best way to overcome this is to check how much cash you’re going to need over the coming months, updating this assessment daily if necessary. Regular cash flow forecasting indicates when a shortfall is likely, and allows you to seek additional funding or take other action to avert a cash crisis.
High levels of bad and doubtful debts
If your accounts show a significant amount of money that was owed to the business has been written off, or there’s doubt whether it will be paid, it’s an indication that your credit control procedures are ineffective. This can compromise your ability to bring in money efficiently and result in a slow decline over a longer period of time.
It’s possible that unrealistically high credit limits have been set for customers, or that you haven’t carried out credit-checks on new and existing customers. Or maybe there’s no effective system within the business for chasing payments.
By improving your procedures, and invoicing customers as soon as work is complete rather than at the end of the month, you’ll find that cash flow becomes more fluid as working capital is naturally introduced into the business.
Pressure from your creditors
Experiencing unrelenting pressure and threats of legal action from your creditors, in the form of phone calls, emails and letters, is a sure sign that your business isn’t in the best financial health.