For many small business owners, solid financial planning for the future doesn’t often get considered until the cracks have already started to appear. Similarly, the downfall of profitable businesses can simply be a result of not having enough cash.

The earlier that a cash flow problem can be recognised, the quicker the business can take action to counteract and minimize the effects of it.

There are several warning signs that business owners should be aware of that can signify there is a cash flow problem on the horizon. Some such signs include:

• Margin erosion – a continued decline in profit margins can indicate a business’ inability to maintain their share in the market
   
• Overtrading – if a business experiences rapid growth/expansion then it can follow that by increasing borrowings to meet new cash requirements, the cost of doing so can not only drain cash, but also impact business operations
   
• High gearing – having a business that is structured to rely heavily on borrowed funds can result in a large proportion of the gross profits being utilised to service the loan/s. This is particularly important in today’s business economy where interest rates are high, and continue to get higher.
   
• Undercapitalisation and continually injecting capital loans into a business– a lot of businesses simply do not possess sufficient amounts of capital to fund expenses such as tax, staff and supplier payments.
   
• Lack of cash flow forecasting – businesses that do not prepare regular cash flow forecasts are usually headed for trouble. The absence of a cash budget is a critical sign that there are problems ahead.
   
• Difficulty paying creditors and meeting obligations for GST and PAYG – one way of ensuring there is cash available to meet tax obligations is to have a separate nominated account for this purpose. This account should not be relied upon to maintain positive cash in the business.
   
• Lack of financial information – by not producing regular financial information a business has little idea of how it is performing or where it may be heading. Where a business is slow to produce its reports and other tax-based information this is also a sign that the business may be in trouble.