NFIB

Early Warning Signals of Upcoming Cash Flow Problems
06/ 04/ 2002

During shaky economies, many small businesses have periods of cash flow disruption. So it's essential that every small company heed early warning signals that could indicate upcoming cash flow problems. The earlier such problems are faced and dealt with, the easier they are to fix.

All too often, however, small business owners are so wrapped up in their day-to-day operations that they overlook clear and persistent indications of future difficulties. In today's Workshop, contributor Jeffrey Moses discusses seven highly indicative early warning signals for which all small business owners and managers should monitor.

1. Checking and savings balances have dipped below normal averages.

Such dips may not suggest current or upcoming cash flow difficulties, especially in periods when increased funding is going toward marketing, upgrading equipment, leasing new facilities or taking on new employees. But if bank balances continue to be lower than anticipated, attention should be given to potential upcoming cash flow problems.

2. Sales "pipeline" is slowing and sales staff are reporting fewer productive sales calls than in the past.

In many businesses, it takes numerous sales calls to produce a new customer. The process may involve repeated visits over weeks, months or even a year or more. When this is the case, future revenue can be estimated by how hot or cold the sales pipeline is.

3. "Bread and butter" articles of inventory have remained unsold for longer-than-expected periods.

Most companies have trendy items that sell rapidly. But demand for these items may last only a season or two before slowing. Lasting profitability is often based on turnover of items that sell slowly but steadily month in and month out. When these items aren't selling as well as they have been, it could be an indication of upcoming revenue shortages.

4. Payments to suppliers are continually delayed or put off altogether.

Most companies pay suppliers 30, 60 or 90 days after invoices are received. When payments are pushed to the maximum or beyond, cash flow difficulties are indicated.

5. Upper management retracts set plans for all types of growth and development requiring additional funding.

Cash flow shortages should be recognized when costs such as increased seasonal advertising, addition of new key employees and trade shows booths are cut.

6. Banks and other loan providers ask for additional information on financial statements and loan requests.

It's surprising how many business owners overlook or disregard warnings from their bankers and other financial associates. The comments and reactions of lenders should be taken as valued information, not criticism.

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