Cash flow is the foundation of your business’s financial health. Ignoring early warning signs can lead to serious issues, including the inability to pay bills or meet payroll. Whether you’re a tradie, in professional services, or managing a health and wellness business, recognising these red flags early can save you from financial trouble.
Here are the top five cash flow red flags to watch out for and how to address them:
1. Consistently Late Payments from Customers
Late payments are a major disruptor to cash flow, especially if they’re frequent.
- Why it’s a problem: It reduces your available cash for operational expenses.
- What to do:
- Send invoices promptly and follow up with automated reminders.
- Consider offering discounts for early payments or imposing late fees.
- Use tools like Xero or Chaser to manage receivables efficiently.
2. Regular Use of Credit to Cover Operating Expenses
Relying on credit to meet day-to-day expenses signals deeper cash flow issues.
- Why it’s a problem: It increases your debt load and interest costs.
- What to do:
- Reassess your budget to identify areas for cost reduction.
- Focus on improving payment collection to increase cash inflows.
- Build an emergency fund to cover short-term needs without relying on credit.
3. Recurring Negative Cash Flow
Negative cash flow over multiple months indicates your business is spending more than it earns.
- Why it’s a problem: Prolonged deficits can deplete reserves and lead to insolvency.
- What to do:
- Perform a cash flow forecast to identify periods of shortfall.
- Increase revenue by diversifying income streams or raising prices.
- Cut non-essential expenses to stabilise cash flow.