Six warning signs that you’re heading for a cash crunch

When a business fails, it’s easy to look back with hindsight and see where things went wrong.

 

When you’re in the throes of your day-to-day work, however, it can be easy to miss the signs that all is not well.

 

Many common business problems can be overcome or avoided by adopting basic planning procedures in pricing, operations and marketing. But the key to financial health is to spot problems before they become too big to solve.

 

It’s vital for a business in its start-up phase to identify these warning signs as quickly as possible and look to deal with them immediately, rather than panic or simply hope that they will go away.

 

Here are six important warning signs you should watch for, and what you can do to overcome them.

1. Margin erosion

 

Continued erosion of your margins can mean that you’re struggling to maintain market share, putting your business in a precarious position.

 

To fix it, perform a detailed, line-by-line analysis of your profit and loss each month and keep a close watch on your sales and costs. Producing regular financial information should be a vital part of your analysis.

 

2. Overtrading


If your business is expanding too quickly and is borrowing to meet its cash needs, cashflow constraints can begin to hinder your day to day operations.

 

Keep a close eye on your wage and supply costs and look for ways to minimise your fixed costs. Build in as much flexibility as possible in your outgoings so you stay cashflow positive in slower seasons.

 

3. High gearing

 

In the same vein, an over reliance on borrowed funds results in a significant proportion of gross profits being channeled towards servicing loans.

 

Review your finance and calculate how much your borrowing is costing you.

 

4. Under-capitalisation

 

If your business is struggling due to inadequate working capital, you’re likely to experience trouble when it comes to meeting your taxation, supplier and staff obligations – problems that will only be exacerbated if you’re also trying to grow.

 

To solve your capital problems, update your cash projections and factor in any seasonal (or holiday) shortfall so that you know how acute your situation is.

 

Review your stock and supply chain. Bulk-buying always sounds like a way to shave costs, but have you factored in the expense of storage and insurance? Look for ways to ‘tighten the ship’ and get rid of old inventory quickly.

 

5. An unknown cashflow

 

A business that fails to prepare cashflow forecasts is likely to be headed for trouble. Put systems in place so that you know where your cashflow status is at and where it’s headed for at least the next 12 months.

 

Maintain your cash reserves by taking full advantage of the payment terms offered by your suppliers and paying on the last day, or ask for discounts for earlier payment.

 

Speed up payments by shortening your payment terms or offering incentives for your debtors to settle their accounts promptly.

 

6. You struggle to pay creditors and meet GST and PAYG obligations


It’s vital that you closely manage your tax and other obligations. Rather than paying in lump sums, save as you go by transferring money into a separate bank account.

 

Never use these funds as a ‘float’. To get more money in the door, review your invoicing and accounts procedures, to ensure you are invoicing when goods and services have been delivered and that payment is promptly followed up.

 

The good news is that if you’re on the look out for problems, you stand a good chance of being able to do something to fix them in time to get your business back on track to success.

 

Keep an eye out for warning signs, constantly review your financial position and borrowing practices and seek expert help if you need it.

 

Rob Lamers is CEO of Oxford Funding, a tailored debtor finance specialist owned by the Bendigo and Adelaide Bank Group. He has 12 years’ experience in the fast-growing industry of debtor finance in Australia. www.oxfordfunding.com.au

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