5 Red Flags in Your Cash Flow You Should Never Ignore

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.

High Levels of Inventory or Slow-Moving Stock

For businesses that hold inventory, unsold goods can tie up valuable cash.

• Why it’s a problem: Excess inventory increases storage costs and reduces liquidity.
• What to do:
  • Review sales trends to forecast demand accurately.
  • Offer promotions or discounts to clear slow-moving stock.
  • Transition to a just-in-time inventory system to minimise overstocking.

5. Using a Business Account for Personal Spending

Dipping into the business account for personal expenses is a common issue, especially for company directors.

• Why it’s a problem: It creates director loan accounts, which can lead to tax complications and inaccurate financial records. Additionally, spending beyond the wage or dividend being paid quite often highlights an issue with personal budgeting and potentially living beyond one’s means.
• What to do:
  • Set a regular wage or dividend payment for yourself.
  • Keep personal and business expenses separate by maintaining distinct accounts.
  • Work with an accountant to properly manage director loans and avoid compliance issues.
  • Review your personal budget to ensure it aligns with your set payments, avoiding the need to dip into business funds.

How to Stay Ahead of Cash Flow Issues

• Regular monitoring: Use accounting software to track income, expenses, and overall cash flow in real time.
• Plan ahead: Create monthly or quarterly cash flow forecasts to anticipate challenges.
• Seek advice: Work with an accountant or financial advisor to identify areas for improvement.

Final Thoughts

Spotting and addressing cash flow red flags early is crucial for keeping your business financially healthy. By staying proactive and using the right tools, you can prevent small problems from becoming major issues.

Call-to-Action

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