Although it would seem apparent when a business is struggling, some of the more obvious signs are often overlooked. The foundation of every company is in the management of its cash flow. A brief examination of some key financial reporting signs will go a long way in keeping your business healthy.
Are your revenues decreasing or not meeting budgeted expectations? This is probably the most obvious indicator yet the trend can be overlooked, particularly if billings are not completed on time. Revenue under expectations may be attributed to unbilled work or other timing problems. These results are often accompanied with comments like “we’ll make it up next month’; or ‘we have a lot of work in the hopper’. Ensure your invoicing is current, revenue is being charged to the correct period and you have budgets to compare to.
Accounts receivable (A/R)
Are your receivables increasing? It’s natural for A/R to increase when following an increase in sales, however it’s imperative to watch the aging of your accounts receivables in buckets of 30, 60, 90 and over-90. Meeting or exceeding all your expectations in sales won’t increase your cash flow if you are not collecting your billings in a reasonable amount of time. Industry collection periods vary but exceeding 45 days will likely put pressure on your bank account, particularly if you have a lot of wages that have already been paid to your employees. Receivables beyond 90 days become increasingly difficult to collect. If most or all of your sales are on credit, it’s very important to have someone consistently (at least monthly) contacting customers for payment.
Accounts payable (A/P) and operating lines of credit
Are you receiving more and more phone calls for late payments, and/or are your lines of credit increasing? Similar to A/R invoicing, A/P invoices must also be entered into the appropriate period. Missing invoices may result in profits being overstated. Shareholder draws and personal expenses must also be accounted for as they can reduce available cash.
Are your government remittances late or in arrears? This is double jeopardy; from a cash flow perspective and that government remittances are a liability of the directors. Depending on the level of the arrears, digging out can be difficult. Using government remittances as a method of financing is a sure sign of an un-healthy business. Often the business will require debt or an injection of cash from shareholders personal assets to pay the arrears.
Records and financial statements
Poor accounting records and or incomplete financial information are in themselves a warning sign. If you have no way of determining your financial position, you are at a major disadvantage despite all the positive aspects and efforts of running your business. Are your records up to date? Are all your invoices entered and all bank accounts reconciled? Many businesses operate independently and a spouse ends up ‘keeping the books’. If your records are not up to date, consider hiring a professional bookkeeper.
Note: This article is not a substitute for professional advice.