Cashflow – How to set warning triggers

Every company will have a particular way of tracking and measuring how their business is performing. If you can identify when key indicators deteriorate to a level that causes financial concern, you can take early action. Income and expenditure seldom happen simultaneously, so good cashflow warning triggers can help your business prepare for future shortfalls.

5min

Setting the scene; demand triggers
 

The most manageable warning trigger for business cashflow tends to be your monthly sales revenue. Typically, you'll need the working capital to cover your operating expenses or your growth target when it falls below a certain amount. But this method of managing your cashflow isn't particularly effective in the long term. 

The question you need to ask yourself is, ‘what drives the demand for what you do?' Cashflow or demand triggers are those things that lead to sales that help forecast an upcoming problem. For example, you can have assets, such as accounts receivable, but your business won't enjoy a positive cashflow if you don't get paid by your clients. 

The reason behind the reduction of cashflow in your company could be:

  • New customer acquisition. You may have begun to generate fewer new leads, and you're finding it much harder to close new customers. The demand triggers can be a drop in repeat business from existing customers, new leads from the sales team, in-bound queries from prospects, demos or meetings booked, or passing foot traffic. 
  • Customer retention. Existing customers are leaving, receivables are arriving later and later, they're spending less money on purchases, or they're switching to the competition. 
  • Your product line or service is no longer of interest to your customers. As a result, your inventory turnover rate (ratio of cost-of-sales to inventory) has slowed, leading to holding too much stock (or worse, obsolete stock). 
  • Increased online noise and distraction. Web traffic, social media activity, or the number of online queries has dropped. 
     

You could also monitor several business ratios to keep tabs on the cashflow and performance - review what's relevant to you and then identify ways to strengthen these numbers. 

Gross profit trigger example

Let's say you want to track and measure your gross profit percentage (the margin from what you sell an item for and what you pay in materials or products to sell it). If your current percentage is 30%, you may decide if it falls to 25%, then it's a trigger to become concerned. 
 

Once you've set the threshold for the particular aspect of your company, you may want to have some ready-to-go tactics to fix your cashflow problem as soon as possible. 
 

Where is the cashflow leakage, and what can you do about it? For example:

  • If your prices haven't kept up with your costs, you could be losing money on specific products or services. So instead, generate more cashflow by increasing your prices, ask current suppliers to reassess what you're paying (especially if you have a good long-term relationship), or search for alternate cheaper supplies. Or maybe, in some situations, stop offering those products and services altogether.
  • You (or staff) are possibly giving away too many discounts to customers to lure them away from the competition or entice them to buy your product or service, especially if your team has a sales target to hit. The solution can be investing in intense staff training or educating them about profit margin and why it can sometimes pay to lose a sale than sell it too cheaply.
  • Your business may be at risk of theft (from staff or the public). Hopefully, this is never a significant issue, but it's worth paying attention to.
  • There could be an increase in wastage. Conduct an exercise to spot areas where operations are running inefficiently, then devise ways to minimise them. This includes only buying what you need, recycle and reuse as much as you can and make sure your employees are doing so as well. 

Setting your triggers

Suppose you can only set a few cashflow triggers - as it's unlikely you'll pay attention to more than two or three. The trick is to focus on a handful of drivers that significantly affect your company cashflow, are measurable, and can be compared to a benchmark such as last year's figures or an industry average. Finally, and most importantly, you must be able to take immediate action.

Problem triggers

In any small business, there can be issues that fall between the cracks. On their own, they may not be too concerning, but they can affect your cashflow - and bank balance - into the future. For example:

  • Unhappy employees through increased staff turnover, in-fighting, petty arguments or an over-abundance of sick leave.
  • Falling revenue per employee, which can imply disinterested or bored staff.
  • An increase in customer dissatisfaction returns, refunds and complaints hint at poor delivery or fulfilment.
  • An increase in downtime (staff or machinery) can cause inefficiency, poor scheduling or mismanagement.
     

Create your own list of what could indicate a warning that all is not well.

Industry triggers 

Determine what industry measures affect your cashflow. For example:

  • Retailers: Look at foot traffic, web traffic, and the changing demographics of consumers or businesses that live or work nearby.
  • Manufacturers: Track work in progress, the number of contracts you have in place, and your distribution channels' speed.
  • Software subscription providers: Check the speed of adoption of your solution and how many leads are in your sales channel, on-boarding and downtime.
  • Agricultural businesses: Monitor yields, market prices, the weather and labour to output ratios.

Summary 

Keep your accounting simple. If you're not confident with money management, investing in professional accounting services will be highly beneficial. Another great option for small business owners is using quality accounting software in conjunction with their own cashflow statement to help them manage operating expenses, income, assets, and payments. With accounting software, you'll always know if you'll have the working capital in your account to ensure your staff get paid, and that you have the money to cover inventory and other business payments and investments. 
 

Cashflow warning triggers only work when you can compare them to past data. Use a past cashflow statement to benchmark your current performance and analyse your business operations against similar businesses, especially competitors. Your accountant, bank manager or industry association may be able to provide advice on industry benchmarks.

Next steps

  • Decide which non-financial triggers you'd like to track and set about regular performance measures.
    Contact your banker, or if you like, enquire online, visit a branch, or call 0800 272 222 to find out how we can help keep your business generating a positive cashflow.

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