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Warning signs of trouble ahead

Running your business at a loss is normal if you’re starting out or growing fast. But if it continues, you may be in trouble. Here are warning signs to look out for and tips for getting back in the black.

Owed more than you earn

Unpaid debts and the impact they have on cash flow is one of the biggest risks your business can face. If you have no money coming in, you can’t pay your suppliers without going into debt or using up cash reserves.

Sometimes business can be booming and you still have no money in the bank. The answer is to focus on getting paid in full and on time.

One way to reduce the risk is to have a cash flow forecast for all your income and outgoings. You’ll see shortages coming and can plan to lessen the financial blow.

Relying on a single client is a potential risk for small  businesses  — especially if they don’t pay on time.

Relying on a single client is a potential risk for small businesses — especially if they don’t pay on time.

This is quite normal for start-ups, but could be a warning sign for more established businesses. 

Tips for getting paid

Getting paid in full and on time is crucial for good cash flow. Here are some tips on how to do it:

  • Keep up good relationships with customers. It makes it easier to talk about any unpaid bills.
  • Chase debts promptly. The longer you leave it, the harder it is to get paid.
  • Have a process for chasing debts. It could be an email follow-up once your invoice is overdue. If it’s still unpaid three days later, phone up the customer.
  • Automate invoicing. If you haven’t automated your invoicing, check you actually sent one — you may be waiting on payments for an invoice your customer never received.

Not paying your debts

Do you routinely pay bills late?

The flip side of not getting paid on time is you don’t have enough in the bank to pay your own bills. It’s another sign you need an accurate and up-to-date cash flow forecast.

Tips for paying bills on time

If you don’t pay your suppliers on time and in full they may stop supplying you — a huge risk to your business. Here are some tips on how to do it:

  • Update and monitor your cash flow forecast. This means you’ll know when to expect regular bills.
  • Put money aside solely for paying bills. If it’s in a high-interest savings account, it’ll earn you money.
  • Talk to the people you owe money to. If you explain why you’re short of cash, they may agree to delay or stagger your payments.

Costs outweigh income

The longer your income falls below your costs, the harder it’ll be to get into profit.

If your business slows down at the same time each year, factor this seasonal downturn into your cash flow forecast. Spotting a general dip in the economy or your sector is hard to do. A good place to start is the Inland Revenue website — its Industry benchmarking tool (external link) helps you assess your performance by comparing your business with others in the same industry.

An accountant can help you improve your financial forecasting.

Use this tool to analyse your figures and find out how much you need to sell to break even and meet your overheads.

To use this calculator, simply estimate the profit you expect to make from the product and then enter your data (such as materials and labour costs).

See how your break-even point changes as you experiment with different prices and costs.

Too little time on your accounts

What’s your cash flow? Your break-even point? How much of what you make or supply do you need to sell to meet your costs — and how much to make a profit?

If you can’t answer these questions, your business could be in trouble. You need to know what money is due into your business and when.

Cash flow forecasts also calculate your outgoings, so you know when you’ll have the money to pay your bills. Get your accountant to help you understand your long-term cash flow.

Other warning signs

There are other signs to look out for in your day-to-day business including:

  • less or no pay for yourself
  • no pay rises for your employees
  • high staff turnover and/or no new staff
  • low morale
  • projects delayed or axed
  • you’ve lost your passion for the business.

If any of these apply to you, talk to an advisor who specialises in turning businesses around.

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