An early warning system for your business before it hits the danger zone

(Copyright © 2014 by Chesney Bradshaw, all rights reserved)
(Copyright © 2014 by Chesney Bradshaw, all rights reserved)

I was travelling from Cradock through to Aliwal North in the Eastern Cape when the radiator warning light came on. Unfortunately there was no water in the radiator water reservoir. After stopping, we’ve filled the radiator with water from fresh drinking water bottles and were able to resume our journey.

Just imagine the drama and inconvenience if the car didn’t have an early warning indicator light on its dashboard to give a heads up that the water had run out. The result would have been that the engine would have overheated and could be seriously damaged. Being many kilometres away from the nearest town would have involved hiring a tow truck. The delay to our journey would have also met additional cost for an overnight stay in a bed and breakfast outlet in the nearest town.

All this damage, inconvenience and cost was prevented by an early warning system.

Do you have an early warning system in your small business?

The most common cause of business failure is running out of cash. It’s not the only one but the biggest. Unless you keep your eye on the cash flow in your business, you can “overheat” very quickly and if you don’t have an emergency line of credit, you may well have to close your doors.

Some of the early warning signs that spell a cash flow disaster include:

– An increase in cost of sales. With your margin continually eroding, your solvency comes into question because you can’t compete in the marketplace.
– Late paying of creditors or any financial obligations.
– Regular cash injections from loans.
– Inadequate capital base, which basically means that you don’t have sufficient money to finance your ongoing operations.
– Slowing sales and reducing inventory turnover.
– Customers who have lines of credit with your business are slow to pay (in this economy even large companies are paying beyond 100 days).

The most obvious warning sign is when your checking account and savings account balances have dropped below their normal averages. In this case you need to check out the reasons for this urgently. You may have had some large cash outflows because of purchases or marketing expenditure that could be non-recurring and you would need to make provision for this. But if the trend in your checking account is southward, you really need to come up with a plan and rather quickly.

A simple but very effective trick in establishing an early warning system for your cash flow in your small business is to work out your daily cash balances. You may think this is crazy for a small business but in this economy if you are running on a tight wire, you may need to implement it. With the number of small businesses that have keeled over and died, hope is not a strategy but clear purposeful action is.

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