What are the first signs of business cash flow problems?

Even the most profitable businesses can fail due to a lack of cash, so spotting the early warning signs of cash flow problems in your clients’ businesses plays a key part in preventing insolvency.

The issues that can compromise cash flow aren’t necessarily difficult or expensive to remedy. Your clients may just need your support to implement a new system, or professional guidance on the best way to collect their own debts.   

So what should you look out for to help them avoid financial distress?

Difficulty paying the bills

Falling behind with day-to-day bills is often the first cash flow problem businesses experience, and also one that can quickly lead to insolvency if not addressed. HMRC arrears can be particularly troublesome due to the power they hold to wind up businesses they believe are insolvent. Supplier payments are also a huge concern as stock deliveries may be refused until the account is brought into line, making it extremely difficult for a client to operate efficiently. 

Carrying too much stock

Holding excessive levels of stock ties up working capital unnecessarily, but could also be an indication that sales have dropped. Apart from the cost of storing stock and maintaining the storage space, inventory values may also fall dramatically if items become obsolete due to changing market trends.

Overdraft at its limit

Overdrafts are designed to be a temporary stopgap for businesses rather than a permanent funding solution, so any client operating with a bank overdraft facility consistently at its limit does have cash flow problems. It’s an ideal short-term financing solution when it’s known that a payment will come in soon, but one of the issues is that the bank can cancel the facility without notice and demand the full outstanding amount to be repaid.

Seeking new lines of credit

When a client is unable to extend their existing facilities - maybe suppliers are rejecting an application due to existing payment arrears, for example – it’s likely they’ll seek new lines of credit or borrowing. These applications may again be rejected, however, if lenders view them as a high risk for default, negatively affecting their credit score.

Pressure from creditors

Increasing numbers of warning letters, threats of creditor legal action, or clients who are constantly ‘firefighting’ creditor issues, indicates a struggle with cash flow. It only takes an unpaid debt of £750 before a creditor can issue a winding up petition, which can ultimately lead to liquidation and business closure.

Poor credit control procedures

A high level of bad and doubtful debts, excessive debtor days, and a general lack of effective credit control procedures, adversely affect a business’ cash flow position but can also trigger a slow deterioration in profitability and business performance. 

Overtrading

If businesses take on long-term contracts that use up cash resources or require upfront investment in new staff or equipment, but don’t receive payment until the job is complete, it can seriously undermine their cash flow and cause a rapid decline. The client may feel that securing such a contract only leads to growth, but without planning their cash needs and controlling costs it can be a risky strategy. 

No useful management information

If accurate management information isn’t available, such as the business’ gross profit figures, number of debtor days, regular costs, and volume of monthly sales, it compromises the ability to operate effectively. Without reliable facts and figures it’s very difficult to halt a financial decline, or even take any meaningful action to improve the situation.

Handpicked Accountants operates a national network of qualified accountants, providing referrals to business owners around the UK. If you want to find out more about becoming a Handpicked Accountant, and the benefits for your practice, please get in touch with one of our partners.