How to Spot a Cash Flow Problem

Why Early Detection of Cash Flow Issues Matters

By looking at a business’s cash flow, you’ll get a clear indication of its overall financial health. Positive cash flow means more money is coming in than going out to pay suppliers, employees, and lenders. When there is negative cash flow, the expenses outweigh the income, resulting in a mountain of debt and a higher risk of insolvency. Even businesses making a profit can run into cash flow challenges if client payments are delayed or too much money is tied up in stock or other illiquid assets. Therefore, recognising potential signs of trouble early will help find a quick solution without the need for costly loans.

Signs You Have a Cash Flow Problem

The early warning signs that a business is heading into a cash flow crisis are subtle but will escalate quickly if they’re not addressed. When running a business, make sure you keep an eye on these cash flow red flags:

1. Customers Start Delaying Payments

Customers delaying their payments is one of the first signs of cash flow trouble. Just a few late payments can create a domino effect, cutting into funds needed for essential costs. If delayed payments become a pattern, it’s a strong signal that cash flow might be stretched. Acting early can help prevent bigger issues with covering everyday expenses.

2. Cash Reserves Are Low

Liquidity is essential for a business to manage everyday expenses and be prepared for unexpected costs. If cash reserves have become low or there is a noticeable decline in available money, it’s likely to cause problems with paying invoices on time.

3. Short-Term Loans to Keep the Business Afloat

Turning to short-term loans to cover everyday expenses or fill cash flow gaps can feel like a quick and easy fix, but it is a big warning sign of future problems. Heavily relying on them to keep the business afloat often leads to unmanageable debt and high-interest payments. This can be a tough cycle to escape from and is a further sign that cash flow isn’t stable enough.

4. Payments to Suppliers Are Delayed

When cash flow starts to become a problem, one of the first signs is usually a company delaying payments to suppliers or trying to negotiate longer payment terms. Although the odd missed payment might not cause too many problems, suppliers are likely to have concerns about continuing to trade together if it becomes a habit, severely affecting the supply chain.