What are some early signs of cash flow problems?

Operational Indicators

These signs stem from the day-to-day running of the business and often precede noticeable impacts on financial statements.

• Increasing Days Sales Outstanding (DSO): A lengthening DSO indicates customers are taking longer to pay their invoices. This ties up cash and reduces liquidity. For example, a company with a standard 30-day DSO suddenly experiencing a 60-day DSO is a red flag.
• Rising Accounts Payable Days (DPO): While seemingly positive, a significant increase in DPO (taking longer to pay suppliers) can indicate a deliberate strategy to conserve cash, suggesting underlying financial stress.
• Inventory Buildup: An increase in inventory levels without a corresponding increase in sales suggests products aren’t moving, tying up valuable cash. This is particularly concerning for perishable goods.
• Difficulty Securing Trade Credit: Suppliers reducing credit limits or demanding cash on delivery signals a lack of confidence in the organization’s ability to pay.
• Increased Customer Complaints Regarding Payment Issues: A rise in disputes or complaints about billing or payment terms can indicate underlying financial strain impacting customer relationships.

Financial Statement-Based Indicators

These indicators are revealed through analysis of the organization’s financial statements.

• Declining Gross Profit Margin: A shrinking gross profit margin suggests increasing costs of goods sold or declining selling prices, reducing the cash generated from each sale.
• Decreasing Operating Cash Flow: This is a critical indicator. A consistent decline in cash flow from operations, even with reported profits, suggests problems converting profits into cash.
• Negative Working Capital: When current liabilities exceed current assets, it indicates a short-term liquidity problem. This means the organization may struggle to meet its immediate obligations.
• Increased Reliance on Debt Financing: Frequently borrowing to cover short-term expenses is a sign of cash flow problems.
• Consistent Negative Cash Flow from Investing Activities: While investment is important, consistently negative cash flow from investing activities without corresponding positive cash flow from operations can be unsustainable.

Behavioral Indicators

These signs relate to changes in management behavior and decision-making.

• Postponing Payments to Suppliers: Deliberately delaying payments, even if it strains supplier relationships, is a clear sign of cash flow pressure.
• Frequent Budget Revisions: Constant adjustments to the budget, particularly downward revisions of revenue forecasts, suggest uncertainty and potential cash flow shortfalls.
• Reduced Investment in Marketing and R&D: Cutting back on long-term investments to conserve cash indicates a focus on short-term survival.
• Management Taking Personal Loans to Fund Operations: This is a desperate measure indicating a severe lack of access to external funding.
• Increased Scrutiny of Every Expense: While cost control is good, excessive scrutiny of even minor expenses can indicate a pervasive sense of financial anxiety.

Indicator Category	Specific Sign	Potential Impact
Operational	Increasing DSO	Reduced liquidity, potential bad debts
Financial Statement	Decreasing Operating Cash Flow	Inability to meet short-term obligations
Behavioral	Postponing Payments to Suppliers	Damaged supplier relationships, potential supply disruptions