3 Warning Signs Your Cash Flow Is at Risk

Here are three warning signs you may be headed for a cash crunch, and tips to avoid them:

1. Receivables aren’t being collected fast enough.

When customers don’t pay on time, your cash balance suffers. Invoices may linger in your accounts receivable department because you only send statements out once a month. The number of invoices may be overwhelming or customers may pay late because invoices are confusing or inaccurate.

Tip: Calculate your DSO. Figure out whether you have a receivable problem by calculating your days sales outstanding, or DSO (DSO = accounts receivable ÷ net credit sales × number of days in a month, quarter or year). Then compare the result to the same time period last month and last year. To improve your DSO, consider tightening collection policies, hiring temporary workers to whittle down backlogs, and transitioning to an automated billing system.

2. Inventory is growing.

Maintaining optimum inventory levels is a balancing act. Excessive inventory can burden your business with unnecessary storage and insurance costs as well as creating a cash crunch. But if you fail to accurately forecast customer demand, inventory may not be available when needed. This results in lost sales and a damaged reputation.

Tip: Make inventory management a priority. Consider centralizing the inventory procurement process. Establish and monitor metrics including the number of days inventory is outstanding. Work on quicker supplier turnaround time and set appropriate safety stocks to reorder supplies just in time.

3. Not enough assets to pay your liabilities.

Measure the ratio of your current assets against your short-term liabilities and monitor the trend. You’ll always want enough assets on hand to pay your pressing bills. But you also don’t want your accounts payable to be too low, as it could mean you pay your bills faster than you are getting paid.

Tip: Manage your payables. Pay your bills on time, but not sooner than necessary unless you are being given a discount by your suppliers. Proper cash management means constant and active monitoring. By focusing on the warning signs you can head off a problem before it becomes a risky cash situation.