Having a strong cash flow is imperative for any business to stay afloat. Without readily accessible cash, employees and vendors can’t be paid and the business will eventually collapse. Learning to track and ensure a dependable and balanced flow of incoming cash to meet expenses is Business 101.
It’s not necessarily a simple task—some signs of cash-flow problems are obvious, but others aren’t. Still, it’s essential for a company’s owner and financial leaders to know and quickly address the signs that indicate they may be in danger of running out of ready cash. Here, 14 Forbes Finance Council members share some clear (and subtle) signs and give advice on how to right the ship.
1. Your Fixed Costs Are Rapidly Increasing
One of the obvious flags is when you see that fixed costs are increasing at a pace that is significantly higher than revenue. For example, in the last few years, we have seen tech companies aggressively increasing their workforces before reaching product-market fit. My advice is to optimize the usage of fractional services and the many resources offered by accelerator programs, including office space and expertise. — Lise Birikundavyi, BKR Capital
2. You’re Overspending Or Underselling
All companies should monitor working capital. Well-managed working capital means companies effectively balance the resources needed to pay expenses and produce inventory with available cash and incoming customer payments. To right negative working capital, identify if you’re overspending or underselling. A simple action such as calibrating production to match demand can have a sustainable cash impact. — Sindy Wilson, Lyft
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3. You’re Consistently Late In Paying Employees And/Or Vendors
A sign that a business may be in danger of soon running out of ready cash would be if there are consistent delays in paying employees or vendors (if applicable). When this happens, it’s usually because there isn’t enough cash coming into the business, so all employees are getting paid late—which can lead them to leave for other jobs where they know they’ll get paid on time every week or month. — David Abreu, Pacific United Financial Group
4. You’re Considering Tapping Into Personal Credit Lines
“Should I use my personal credit lines (such as credit cards or home equity) to shore up my business?” The moment a business owner asks themselves this question, you know the business is near the end. To right the ship, a number of actions will likely be required; there’s no silver bullet. Chasing payments, extending terms, discounting inventory and immediately cutting expenses are all good examples. — Sameer Gulati, ZenBusiness
5. You’re Frequently Borrowing From Lenders
A major drop in sales or income, a rise in costs and frequent borrowing from lenders all indicate a firm may run out of cash. To right the ship, an owner should focus on increasing sales and efficiency, reducing costs where possible and exploring alternative sources of financing. Having tight control over spending is essential to getting back on track with ready cash. — Angelo Ciaramello, The Funded Trader
6. You’re Experiencing Rapid Growth
Rapid growth can be a warning sign for a business’ cash flow. While growth is good, dramatic increases in demand may lead entrepreneurs to purchase more products or even hire additional staff. In order to sustain this growth while maintaining ready cash, entrepreneurs should monitor cash reserves and make adjustments when necessary. — Luz Urrutia, Accion Opportunity Fund
7. Your Cash Payments Are Greater Than Your Cash Income
Cash payments greater than cash income are one sign that a business will soon run out of ready cash. To right the ship, an owner should scrutinize all outgoing funds, cut unnecessary expenses and minimize spending where possible. Additionally, an owner should prioritize income-earning opportunities for the business, such as increased media exposure or networking. — Jared Weitz, United Capital Source Inc.
8. Your Slow Periods Are Increasingly Painful Each Year
Slow months are inevitable in almost every business, but if they start to hurt you more and more each year, then it may be a sign of danger. Always capitalize on your busier periods to cover targeted operation costs for slower months. Ensure that you motivate and incentivize your team to soar above targets, and investigate new avenues for your business that will continually bear fruit. — Xan Myburgh, Backd Business Funding
9. Your Working Capital Is Low
Working capital is a critical indicator of a business’ short-term financial health and a telltale sign of whether or not a company can pay its bills and maintain operations. For businesses with low working capital, consider assessing internally and reducing unnecessary expenditures, improving inventory management by holding less stock or obtaining long-term debt. — Nick Chandi, ForwardAI
10. Your Debt-To-Income Ratio Is Rising
A rising debt-to-income ratio is an early leading indicator of potential solvency issues. Whether debt is used to expand capital assets or finance operations, increasing debt levels show the business is struggling to finance expansion or ongoing operations. Detailed budgeting and forecasting are the best ways to avoid future cash shortfalls. Make sure every project, new hire or spend has an ROI. — Glenn Hopper, Sandline Global
11. Your Customers Are Delaying Their Payments
Pay attention to how quickly your customers pay their bills. If they start delaying, that’s a warning you may have future cash flow issues. In the immediate term, don’t expose yourself to more expenses from a client who owes you a lot of money—let the client know you need to slow things down on your end until they get current. How the client reacts will indicate if they are a credit risk. — Aaron Spool, Eventus Advisory Group, LLC
12. You’re Spending More Than You Make Each Week
Wondering if you are in a cash crunch? At the top of the list of warning signs is that you are spending way more than you are taking in each week and struggling to cover payroll and overhead. Eliminate all expenses that do not generate sales, and be sure to look for a business loan or line of credit as soon as possible. — Leo Kanell, 7 Figures Funding
13. Your Cash Burn Rate Is Rising
Know your indicators. Understand the drivers of the business, and pivot when necessary. KPI trend tracking is key here: current ratio, quick ratio, cash burn rate, cash runway, cost per employee, general and administrative costs—and the list goes on. For instance, an increase in your cash burn rate indicates a need to investigate the cause. Understanding what drives this will enable proactivity versus reactivity. Know your metrics. — Cynthia Hemingway, Fourlane, Inc.
14. Your Sales Growth Is Slow Or Profits Are Falling
Poor sales growth or falling profits might be the early signs of a business heading toward being low on cash. The owner can be proactive by projecting and monitoring the cash flow statement; maintain a tight payment cycle to manage cash inflows and outflows. — Bilal Surahyo, Sleep Country