DO YOU know what signs to watch out for that tell you your business is in trouble financially?

For many business owners, the phone call from your bank manager is the alarm bell that tells you that your finances are not in good shape.

Clearly, this is not the way you should find out – because at this stage it may be too late to address the causes behind the sorry state of your bank balance.

In most cases, entrepreneurs will be watching their bank accounts (often with that sinking feeling that comes with expenditure exceeding revenue) but will not always know what is going wrong.

That is why there are other measures that you need to employ – and these measures need you to have some knowledge about where your business’s money is.

Simply put, you need a thermometer (a few different ones, in fact) to take your business’s temperature, and keep track of just how healthy it really is. Below are a few of the most important gauges you should be using.


Planning ahead

It is always surprising how many businesses run without a financial plan or budget – and as long as your business makes more than it spends, you might get away with this.

But as soon as things start going badly, there will be no early warning signs and you won’t have the tools to dig yourself out of the financial hole you’ve created.

A simple budget is a must – outlining your expected income and expenditure for the year. Work out how much you need to spend each month for the coming year, and how much you need to sell to keep your business profitable.

Then compare your budget figures with your actual figures each month (experts call this variance analysis) to ensure that you are “on the right track”.


Profitability

This process of comparing your budget targets with your ‘actuals’ will tell you if your business is still profitable.

If your sales start sagging, or if your expenditure starts exceeding budget for two or three months in a row, you know there’s a financial problem looming.

Find out what the cause is and fix it. Do more marketing. Work smarter. Raise prices. Do whatever it takes. Just don’t wait for the bank manager’s phone call.


Tight cashflow

Perhaps an even more common problem than profitability is cashflow – you may be making a profit, but there’s still no money to pay your staff.

This simple lag between receiving payment for work done and paying for costs incurred, is the death knell for many small businesses. So you need to watch for signs of this.

Do a cashflow forecast. This is a bit like the income-expenditure budget described earlier, but it must forecast when money will leave your account and when money will arrive.

You have to pay for materials and labour for a big job in January, for instance, but you may only get paid for that work in March. Or you may have to pay wages in the month that you employ people, but your printer might give you 60 days grace before you have to settle their account.

If your cashflow statement shows that you’re going to be in the red for a month or two, make sure you can borrow some money to see you through.

If your cashflow statement shows no sign of emerging from the red into the black, then this is a sign that you are not profitable enough or that you’re being paid too late. Act on it.


Stretched overdraft

An overdraft is often a crucial safety net for businesses that need to meet costs while waiting for revenue generated to come in.

However, an ‘over-used’ overdraft is a sign of trouble. Ideally, you should be able to pay back all or most of your overdraft at some stage during the month. If you find that your overdraft is constantly at its limit, check your profitability and your debt-collecting.


Swollen debtors’ book

The money owed to you by your customers can sink you if it gets out of control, so a debtors’ book that is growing could be a dangerous sign.

If you’re lucky, it could also be a sign that your sales are increasing. Either way, you need to keep track of who owes you what and, as importantly, how long each customer takes to pay.

Make sure your customers know what your terms are (generally 30 days if you sell on credit), and that you have an effective way of collecting what they owe you.