Cash Flow Danger Signals

November 6th, 2008

I thought it would be good to explore some aspects of cash flow beyond the basics of accounts receivable, inventories, accounts payable, and securing lines of credit. All of these areas are critical to making sure your cash flow is flowing and perhaps can be a blog topic for the future.

What I want to point out are a few of the danger signals that might distrupt cash flow from a customer perspective. These are what I call the cash flow danger signals. These tips will help alert you to customer problems and potential bankruptcy. Here are ten tips to keep an eye on so you can be responsive to customers paying you on time:

  • Changes in payment habits
  • Request for longer terms
  • Changes in management – changes or weak management can be signs of potential trouble
  • Staff reductions – particularly financial and accounts payable personnel
  • Changes in order size – request for larger quantities of goods to cover rainy days
  • Financial statement deterioration
  • Checks  with nonsufficient funds
  • Delays in making payments and taking unjustified deductions
  • Unreasonable or uncooperative behavior in attempting to resolve payment issues
  • Making payments to only critical vendors and at the same time refusing or delaying payments to other vendors

The key is to maintain and monitor your customers for any signs of deviation from their normal patterns of behavior and payment habits. Being quick and responsive is critical in this difficult economy since businesses are more likely to struggle and encounter difficulties. Keep your eyes open and act quickly to preserve your cash flow.