A business can look profitable on paper and still face cash pressure. Working capital problems usually appear in the timing of cash movements well before they affect the P&L.
For finance leaders, the key is to identify the early warning signals and act before a temporary cash-flow issue becomes a serious problem.
1. Suppliers Are Being Paid Later
If supplier payments that were previously made within 14 days are gradually stretching to 30 or 45 days, cash pressure may already be building.
Monitor Days Payable Outstanding (DPO) and focus on the trend rather than a single month’s figure. ASIC’s Plymin case identifies creditors being paid outside agreed terms and suppliers moving businesses to cash-on-delivery as indicators of financial difficulty.
2. Current Ratio Is Moving Towards 1
The current ratio = current assets ÷ current liabilities.
A declining ratio indicates that the business has less short-term capacity to meet its obligations.
While the ideal level varies by business, a ratio moving towards 1—or below it—deserves attention. Reviewing this monthly provides much earlier visibility than waiting for year-end accounts.
3. The Overdraft Never Comes Back Down
An overdraft should generally help manage temporary timing differences.
If the facility remains permanently drawn and cannot be reduced during a normal business cycle, short-term borrowing may be covering a structural cash-flow gap.
4. Tax and Statutory Payments Start Slipping
GST, PAYG withholding and superannuation can become difficult to pay when cash is tight. Increasing ATO liabilities or repeatedly relying on payment arrangements should therefore be treated as an important warning sign.
With Payday Super reducing the time businesses have to hold and manage superannuation obligations, cash-flow discipline becomes even more important.
5. Debtor Days Are Increasing
A business can report healthy revenue and profit while cash remains trapped in unpaid invoices.
Track aged receivables and debtor days weekly. If customers are taking longer to pay, the business is effectively financing its customers and putting additional pressure on working capital.
6. You Cannot Clearly See the Next 30–90 Days
One of the biggest warning signs is simply not knowing the answer to:
“How much cash will we have in the next 30 days?”
A rolling 13-week cash-flow forecast can provide the visibility needed to identify upcoming funding gaps and make decisions early.
How Much Cash Should You Keep?
There is no universal number. A practical starting point is three to six months of essential operating expenses.
Calculate your unavoidable monthly costs—such as payroll, super, rent, insurance, loan repayments and essential software—and multiply them by your target number of months.
Businesses with stable recurring revenue may operate towards the lower end. Seasonal businesses, businesses with long debtor cycles or high customer concentration may need a larger buffer.
Keep this reserve separate from everyday operating cash, and consider quarantining GST, PAYG and super obligations separately.
The objective is not simply to hold more cash. It is to maintain enough liquidity to handle the unexpected without relying on expensive short-term credit.
Final Thought
Working capital should be monitored continuously—not after the cash has already run out.
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Credits
Sekan, Services Management Team
