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Four cash flow warning signs directors should look out for

Four cash flow warning signs directors should look out for

Preventing serious issues from occurring is always more cost effective than resolving them once they have. At FactorONE we believe there are four key areas for directors to question their management teams, to ensure they stay on top of cash flow and working capital issues.

1. Debtor Days - If debtor days extend outside industry norms, find out why: are customers struggling to pay, or just won’t pay? Is there an issue with collections activity (for example, with statements, reminders and follow up calls)? Try and understand debtor quality by using various reporting tools. Diversify your customer base to ensure your business won't be as affected by bad debts if and when they may arise. Consider trade credit insurance if necessary.

2. Inventory blowouts - Are stock holdings increasing out of sync with sales, is there a build up of slow moving stock items or out of date stock - is too much stock being held? Is it possible to reduce stock holdings? Move towards JIT (Just in time). 

3. Creditor days - Creditor days lengthening without the suppliers/creditors agreement - this could be evidence of cash pressure building, as could ATO obligations not being met on due dates. 

4. Facility limits - Pressure on funders' facility limits/lending covenants being breached/funders looking to reduce facility limits - signs of cash pressure and potentially a lack of confidence from the funders. Remain close to your financiers and clearly understand their issues. Always ensure adequate headroom in the facility. Ensure funding limits can scale with the business as much as possible.

In some scenarios, Invoice Finance can be a useful tool to mitigate against the risks associated with these issues and ensure the business can trade smoothly. More importantly however, it allows business owners to remain focused on achieving the strategic vision for the business rather than working on managing the business day to day.


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