32. Early Warning Signs Of Cash Flow Problems

SUMMARY

Early Warning Signs Of Cash Flow Problems

In this video, I share some of the warning signs I have found when working with businesses that have an increased risk of cash flow problems in the future.

Transcription

Welcome back. This video, I'm gonna do a short video, just talking about the early warning signs of cash flow. And so, when going into businesses or organisations, these are a few of the things that I've picked up when working with them that's caused sort of an early warning sign, that they've got cash flow issues or they're heading that way.

1. No Cash Flow Forecast

One of the first things is they don't have a cash flow forecast. So, what do I mean by that? That is like having a budget for cash flow as opposed to just a budget for your profit and loss. By predicting your cash flow for the next one year, two years, three years. So, some businesses are quite seasonal, and so their cash flow will go up and down, up and down. And so, if you don't have a cash flow forecast and you're not watching the seasons where you're at, especially for small businesses, they're getting caught here and they're having to fund their business either by themselves or they're not paying tax payments, or they're getting more debt. So, it's critical that businesses have a cash flow forecast.

2. Don't Know Their Break-Even Point For Cash Flow

The next point, which sort of leads into the cash flow forecast is, they don't know their break-even point. So, if a business doesn't know their break-even point, they're not setting revenue goals, sale goals, they don't know how many sales they need to make each day. But on top of the break-even point, I like to work out a cash flow break-even point, which is a little different from you're profit break-even point, because you need for your cash flow, you can't just break-even and you're still gonna be fine. 'Cause if you've got to make loan payments and that sorta stuff, you've gotta actually make more than your break-even point. So, over here. Just to broaden that. So, if your break-even point is say $100,000, so that means you get to the and you're gonna have zero profit. Now, if you're making loan repayments, you might be making, say, $5,000 of loan repayments a year, then you haven't made enough to cover loan repayments. And there may be other things in there, as well, so you might need to by an asset of $10,000, if you haven't covered enough to cover those sort of things. So, it's working out not only your profit break-even point, but your cash flow break-even point.

3. Discounting To Improve Sales

The third thing is when people start discounting because they've got a bit of cash flow problem or they see their cash flow problem. So, the first thing they start doing is discounting. And if the business starts discounting, it's a warning sign that they have a cash flow problem.

4. Debt - Using long-term debt to finance short term expenses

Fourth thing is debt. Do they have too much debt? Or another thing that they do is they mix their debt with their assets or their expenses. So, what I mean by that is, you want to match your short term debt with your short term expenses, and your long term debt with your long term expenses. So, long term debt, so it's like three, five year, you wanna match that with an asset. So, if you buy a vehicle, and the vehicle, you're gonna have it for five years, you want your loan to last five years. However, what some businesses started doing is they get long term debt and they start paying it for things like expenses. So, they might start using long term debt to pay with wages and that sort of thing. And so, when businesses start doing that it's an early warning sign of a cash flow problem.

5. Delays in Paying Tax Obligations

The last one is really for small businesses. And I find, small businesses, if they have problems making their base payment or their income tax payment at the end of the year, it's a sign that they have a cash flow problem. And they're using the tax office as their bank to fund their business. And if they're using the tax office to fund their business it means their business is not sustainable from a profit and a cash flow perspective.

So, this is just five early warning signs. There's other things, but these are five things that I found when working with businesses. So, no cash flow forecast, don't know their break-even point, they're discounting, their debt, they've got too much debt, or their mixing up their debt, or they're finding it hard to make tax payments. Thank you very much.

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