Without robust forecasting and monitoring it’s easy for your cash flow position to run away from you. If you want to get to know the status of your working capital in great detail, there’s no time like the present. Keep your eyes open for these five warning signs that your working capital is not all it should be. If you suspect a crisis is upon you don’t hesitate to call in expert help.
1. Your bank balance is bleak
Running out of working capital is the most obvious sign that your cash flow is not as it should be. If your accounting has focused on profit rather than cash flow then this is not an uncommon issue. Unfortunately, profit does not equate to cash and it’s easy for a crisis to sneak (or jump) up on you. Cash flow relies on a steady flow of cash into the business to balance the steady flow of payables outward – salaries, supplier costs, rent, equipment etc. Something as simple as a late paying customer can quickly create a problem if you are not pro-actively tracking your cash.
Managing and forecasting your cash flow is key to avoiding a working capital shortage. Your key metric for tracking your cash flow into the business is ‘collection days’ – a measure of how many days it is taking your customers to pay their bills. If your business sells to other businesses you should target and track this number carefully as late paying customers can have a disastrous impact on your cash flow.
2. You’re growing too fast
It’s ironic that the path to success lies through growth, but at the same time the biggest risk to the survival of your business is in managing the cost of that growth on a day-to-day basis. The faster your business grows the more working capital you will need. Inventory is a huge consumer of cash and of course suppliers expect to be paid.
Every dollar of inventory that your business holds is cash that is not in your account. If you’re on a strong growth curve take the time to track your cash flow carefully and support your funding with finance solutions that will complement your business where needed. Cash flow is key but profit needs to be considered as well: talk to an expert who can give you advice on the right finance option to allow you to grow without eroding your margins and further reducing your cash position.
3. You’re missing payment discounts
In a competitively priced market, meeting early payment discounts can mean the difference between profitability and a loss. ‘Payment days’ as a metric allows you to track the number of days it takes you to pay your suppliers. It’s up to you to set a target for what you want to achieve: you may choose not to go for early payment discounts and instead keep the money in your account. But what is important is that once you’ve set your target you track and perform to it.
If your payment days start creeping upwards it can be a sign that you haven’t got the cash to support the demands of your business. Establish what you need to achieve for your own success and support your cash flow with finance tools such as invoice discounting/factoring to bring cash into your business sooner if necessary.
4. Slow collections
If you’re in the business of selling to other businesses you will understand that the gap between paying for your materials and being paid for the end product by your customer is one of the biggest cash flow challenges to manage. Track your collection days and be aware of your customers. Credit checking is advisable as a non-paying customer can have a very damaging impact on your cash flow.
If you notice that Collection Days is increasing then you could be heading for a cash flow challenge. Be aware of your cash flow position and be proactive in your communication with customers whose payments are due. Try offering them a discount for early or on time payment, or use invoice finance/factoring in order to bring forward your access to incoming cash.
5. Too much short-term debt
Short-term finance is a great solution to cash flow challenges, but if you use it recklessly it could become the problem in itself. There is a cost to finance – in fees, interest, one-off costs etc. – that has the potential to erode your cash and your profitability. If your bank has refused you credit and you are sourcing short-term finance from multiple providers then it’s possible that you could overextend yourself and your cash flow could go into crisis.
Make sure that you are getting expert advice from someone who views your business holistically. It’s important to understand the complete picture and the impact of the finance solutions that you implement. Look for a consultant, accountant or finance provider who can work in partnership with your business to suggest options that will work for you in the short and long term. Don’t let short-term debt get out of control and be proactive in making changes and finding solutions.