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How to spot if your business is in trouble



Featured | Finance

By Rob Lamers

Cash flow is the lifeblood of any business. A decent cash flow allows a business owner to pay staff and suppliers, meet their tax office obligations on time and deal with operational expenses – as well as making money for the shareholders and providing the funds needed to grow.

Despite this, it’s frightening how many entrepreneurs are unaware of their cash position at any given time.

Why cash flow matters

Having quality clients or work lined up doesn’t guarantee success. Even businesses which are profitable can fail, if they don’t have the cash to meet their regular financial commitments.

The good news for business owners is that early warning signs of financial distress do exist.  Identifying and acting on them can mean the difference between a business surviving and thriving or facing further hardship and potentially going under.

If you have the right processes in place, you’ll work with your accountant or financial adviser to establish monthly cash flow forecasting. A good cash flow statement compares actuals with your budget and forecast, and will cover off revenue, operational expenses, inventory, gross margin, overheads, debtors and creditors.

Putting in place cash flow forecasting means that you’ll be able to spot the warning signs and act on them before your business joins the thousands of small businesses that fail each year.

Early warning signs

Here are five warning signs all business owners should recognise – if you tick any of these boxes, you’ll need to implement solutions that help keep your business financially viable.

  1. Lack of insight into business cash flow. If your business doesn’t have a cash budget, how can you expect to deal with the unpredictable problems that can appear at any time, let alone the day to day management of the business? Putting in place cash flow forecasting gives you this insight into how your business is really tracking.
  2. Difficulty keeping up with payments.Whether the payments are to creditors or to meet regular GST and PAYG obligations, if you are falling behind with payments this is a major warning sign. Running up an ATO debt will most likely negatively impact your business’ credit rating, making it very difficult to secure funding.
  3. Erosion of margins. Many factors can reduce your profit margin, from relying too heavily on discounting, to increased cost of materials used in production. It helps to put in place a margin improvement strategy. Understanding your competitive advantage should be at the centre of this strategy, because this is the primary reason customers buy from you.
  4. Over-borrowing or over-reliance on borrowing. If you are having to do this to keep up with cash flow demands, it will become a drain on your enterprise and, again, it’s unsustainable.
  5. Continual need for capital injections. This is a sign that you have an inadequate capital base, which will cause ongoing problems in financing day to day operations and impede your ability to grow.

Coming to terms with cash flow pressure in your business could involve quick steps including improving invoice information, prompt follow-up of overdue invoices and negotiating longer terms with suppliers, through to more time-intensive (but worthwhile) actions of reviewing how you fund the business.

Finding a funding solution that allows you to retain cash to fuel your business can make all the difference.

One solution is invoice finance, also known as debtor or receivables finance. This style of funding involves a line of credit linked to and secured by your outstanding accounts receivable. This can be an attractive cashflow solution as it allows your business to turn your accounts receivables into much-needed cash.

However there are many solutions out there, it’s a matter of finding the right fit. Scottish Pacific and the small business ombudsman (ASBFEO) have jointly partnered to provide SMEs and their advisors with a Business Funding Guide that talks about main funding options and how to get your business fit for funding.

Knowing the warning signs of cash flow distress is one thing, knowing how to act on them is the vital next step to take.


Rob Lamers is Queensland general manager of Australasia’s largest specialist working capital provider, Scottish Pacific, who fund thousands of businesses from start-ups through to SMEs with revenues of more than $1 billion.