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5 Signs Your Business May Experience a Cash Flow Crisis Thumbnail

5 Signs Your Business May Experience a Cash Flow Crisis

James Zahansky, AWMA®
Principal/Managing Partner, Investment Advisor & Chief Goals Strategist

If you’re a small business owner, chances are you’ve been feeling the pinch of the volatile markets, rising interest rates and labor shortages that have occurred in the last couple of years.

If you’re feeling like your business is on the brink of folding, you’re not alone – but you also don’t have to be among those that ultimately fail. 

In many cases, poor cash-flow management is one of the main reasons businesses fail in general, and even more so in the context of current times.  With that being said, it’s important to recognize when your business is about to face a cash flow crisis so you can act fast to correct it. 

Here are five tell-tale signs that you may be headed for a cash flow crisis:

1. Fast Business Growth

Although growth is good, if you’re growing too fast you may not be able to keep up with the demands and costs on a day-to-day basis. Suppliers won’t be nice when they can’t get their money and customers or clients won’t be happy when you can’t deliver. In this case you’ll need to look at ways to get more working capital so that you can purchase the increased inventory or hire the additional staff you’ll need to keep up with your growth and keep solidly on the path to success. 

2. Bank Balances Are Getting Low

If you do run out of capital it won’t be long before you see your bank balances dipping, maybe even into the red which is obviously a huge red flag that your cash flow is in trouble. Even if you’re still making a profit, that doesn’t mean you’re out of the woods. You need a steady supply of payables to make sure things stay balanced, as operational costs such as salaries, suppliers, rent, equipment, and other items may eat the money that comes in. It’s the simple things such as a late paying customer that can throw everything off. Consider ways you may be able to build at least some guaranteed recurring income into your business so that you have greater ability to plan well for cash flow.

3. Missed Payment Discounts

Tracking the number of days it takes to pay your suppliers can help you keep track of money in, and money out. Meeting early payment discounts can help you stay profitable. If you see payment days starting to come sooner rather than at a normal pace, it may be a sign that you are lacking the cash needed to support business operations.

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4. Slow Collections

If you sell to other businesses, you already know that the gap between paying and getting paid is a huge issue in cash flow. So it’s important to track collections and stay on top of your customers, as non-paying customers can put you in the poor house sooner rather than later. If it’s getting difficult to collect on your account, this will hinder your ability to pay outstanding bills. To avoid that, have a workflow in place that will ensure prompt billing, collect all payments when due, ensure the documentation needed for payment is in place at the beginning of the process, and trigger prompt and proactive follow up when invoices become overdue.

5. Excessive Short-Term Debt

Being prudent in short-term finance options can help you when you need cash. On the flip side, if used the wrong way, it could quickly become a problem. Your business can easily get caught up in paying fees and incurring debt that you cannot handle. Having a financial advisor that can look at your operations and properly advise you is the first step in protecting your business and getting things under control.

Go through your operational revenues to identify any disbursements, when revenues can be collected and develop a workable forecast to determine future cash streams. As your conditions change, this will help to maintain a realistic idea of where you are.

If you’d like guidance building an overall strategic financial plan for the betterment of your business as well as your own personal finances, contact us at Weiss, Hale & Zahansky Strategic Wealth Advisors. We partner with business owners to help achieve their goals, from formulating a growth strategy to developing an exit strategy for business succession.

Presented by Principal/Managing Partner James Zahansky, AWMA®. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. 697 Pomfret Street, Pomfret Center, CT 06259, 860-928-2341. http://www.whzwealth.com.