Signs of cash flow problems

In business.gov.au's glossary, cash flow is simply the movement of money in and out of a business. A problem starts when more keeps going out than comes in. business.gov.au warns that constantly needing more cash than you hold can be a sign of financial strain, and that falling cash flow risks leaving you unable to meet your debts or your everyday running costs.

Running short of cash is not the same as running at a loss. Plenty of sales can still leave the bank account thin if customers take a long time to pay, if money sits in unsold stock, or if a large bill falls due before the takings arrive. business.gov.au explains that accrual accounting records a sale when it happens rather than when the money arrives. That is how a profitable month on paper can still be a tight month at the bank.

business.gov.au's page on the warning signs that a business is in financial trouble names these as signs of a cash flow problem:

• losing track of what money is coming into the business and what is going out
• customers regularly paying after the due date, leaving too little cash for your own bills
• struggling to pay suppliers, or to keep up with debts such as loans
• thin profit margins on what you sell.

Its guide to managing cash flow adds having trouble paying bills, relying on credit to get through, and holding back payments to suppliers.

One late customer or one tight month may not mean much on its own. A pattern that repeats month after month, or several signs at once, is the reason to look closer.

Books that are kept up to date often show the pressure before you feel it at the bank. These are the places to look each month:

• Unpaid customer invoices. A growing total past its due date, or invoices sitting longer and longer, means cash is arriving later than planned.
• Unpaid supplier bills. Bills paid later each month, or a pile of bills past due, can mean the business is leaning on its suppliers for credit.
• Credit card and overdraft balances. A balance that rises every month and is never cleared can mean everyday costs are being paid with borrowed money.
• The closing balance in your cash flow statement. If it falls month after month, even in months you expected to be steady, more is going out than coming in.
• Your forecast. business.gov.au suggests checking actual income and costs against your estimates, so shortfalls show up quickly. Any month where cash in falls well short of the estimate needs an explanation.

Each month on its own might pass without comment, but every column is moving the wrong way. Customers are taking longer to pay, so less cash is coming in, and the business has started paying suppliers late and putting more on the card to cover the gap. Spotting that in April or May leaves time to act before the bank balance runs out.

Cash problems often start further back, in the business's profit or with its customers. business.gov.au lists these signs of poor profitability:

• you can't pay yourself from the business
• your costs have gone up but your profit hasn't
• you depend on borrowed money to keep the business running
• it is getting harder to find new investors or arrange a loan.

It also points to changes in how customers behave: falling sales, the loss of a major customer, and more complaints or requests for refunds. If you notice these, it suggests asking customers for feedback, for example through a survey, a phone call or an email.

Losing staff is on its list as well. When people leave often, business.gov.au notes, replacing them means spending time and money on training, which adds to the pressure on cash.

The aim is to see a problem while there is still time to respond. Among business.gov.au's suggestions for getting a business back on track are keeping invoices, bank statements and other financial records in an organised record-keeping system, and going over the records each week, updating them as you go, to catch problems early. A short weekly check might cover:

1. Bring the books up to date: enter sales, bills and payments, and match the bank transactions.
2. Compare the bank balance, plus the customer payments you expect, with the bills and repayments due over the next few weeks.
3. Look at which customer invoices are overdue, and follow them up.
4. Note any supplier bill you can't pay on time, and why.

A cash flow statement pulls these together. business.gov.au says it helps with forecasting and with knowing what is owed and when each amount falls due. At least once a year, take a wider view: business.gov.au suggests a financial health check of your main financial reports, looking for trends and anything out of the ordinary.

business.gov.au says to sort out financial trouble as soon as you can, because putting it off can make it worse. Its guidance on financial trouble, unpaid invoices and improving cash flow suggests steps in a few groups:

• Bring in what you are owed. Chase outstanding payments and review your payment terms, for example by asking for deposits on special orders or encouraging early payment.
• Talk to customers who are late. business.gov.au's guide to unpaid invoices suggests starting with a friendly reminder, then agreeing a new payment date or a payment schedule if needed.
• Turn stock into cash. If debts are growing, business.gov.au suggests selling old or excess stock.
• Review your costs. Drop costs the business can do without, and arrange a payment plan for larger ones.
• Free up money held in assets. Sell assets the business no longer uses, or lease or hire equipment rather than buying it.

Put each change into your cash flow forecast before you commit to it, to see how far it actually moves the closing balances in the months ahead.

business.gov.au says early advice lets you tackle financial issues before they spiral. If you are worried about whether the business can keep going, it suggests professional advice from people such as a bookkeeper, a solicitor or a business adviser. It also suggests talking to your accountant or a business adviser about your cash flow.

It points to free help as well. Financial counsellors can help at no cost and in confidence, and the Small Business Debt Helpline is a free service whose qualified financial counsellors give practical advice to small business owners in financial trouble. Farmers, fishers, foresters and the small businesses connected to them can get free, independent counselling through the Rural Financial Counselling Service. business.gov.au also recognises that financial stress can affect your wellbeing, and points to mental health support services.