Key takeaways
- A business usually shows warning signs in its numbers before the cash runs out, but owners tend to explain each one separately and so miss the overall picture.
- The main signals are falling cash days, stretching receivables, shrinking gross margin, bloated inventory, the bank starting to ask questions, and key people leaving.
- A single signal is a reason to check. Several signals worsening at the same time are a reason to act.
Few companies collapse in a single day. It is like a car whose warning lights come on before the engine fails, or a person who gets a headache and feels exhausted before a high fever sets in. Yet many owners do not see the signs, or do not want to believe them, because an explanation is always ready: this customer always pays late, a large lot of stock has just arrived, costs are just fluctuating this quarter. Each explanation may be true. When they occur together over several quarters, it is a different matter.
Six signals your dashboard should show
| Signal | How to measure | Question to ask |
|---|---|---|
| 1. Falling cash days | Available cash ÷ monthly operating payments × 30 | If no money came in at all, how many days could we last, and how fast is the trend falling? |
| 2. Stretching receivables | DSO and receivables overdue by more than 90 days | Are customers in trouble, or have we loosened our terms to make sales? |
| 3. Shrinking gross margin | Margin over several consecutive periods | Is it caused by mix, discounts or costs? |
| 4. Bloated inventory | DIO and non-moving inventory | Over-buying, slow sales or obsolete stock? |
| 5. The bank starts asking questions | More frequent document requests, earlier facility reviews, covenants close to being breached | What does the bank see that we do not yet see? |
| 6. Key people leave | Turnover in the finance team, sales team and supervisors | What do the people closest to the numbers feel? |
Common supplementary signals include paying creditors later until you have to choose whom to pay, short-term facilities permanently fully drawn, late payment of taxes or contributions, slower month-end closes, and the owner repeatedly topping up the business with personal money.
Example: four quarters that seem manageable
This is a hypothetical example. Amounts are in THB million, and DSO and DIO are calculated on a 90-day basis.
| Indicator | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| Revenue | 30.0 | 30.0 | 29.0 | 28.0 |
| Cost of sales | 20.0 | 20.5 | 20.3 | 20.2 |
| Available cash | 18.0 | 14.0 | 10.0 | 6.0 |
| Monthly operating payments | 9.0 | 9.2 | 9.4 | 9.5 |
| Trade receivables | 16.0 | 19.0 | 22.0 | 25.0 |
| Inventory | 12.0 | 14.0 | 17.0 | 20.0 |
| Cash Days | 60 | 46 | 32 | 19 |
| DSO (days) | 48 | 57 | 68 | 80 |
| DIO (days) | 54 | 61 | 75 | 89 |
| Gross Margin | 33.3% | 31.7% | 30.0% | 27.9% |
If you look only at the first and second quarters, revenue is the same and nothing seems worrying. But all four indicators worsen every quarter. You should start looking for causes from Q2. By Q4, cash covers only 19 days of expenses, and your room to negotiate is much narrower than in Q2.
Turning signals into decisions
- One signal: check the cause, assign an owner and follow up within two weeks.
- Two to three signals, worsening over two periods: prepare a 13-week cash plan, defer investments that are not yet committed, speed up debt collection and negotiate with suppliers.
- Four or more signals, or covenants close to being breached: talk to the bank before a breach occurs, review fixed costs, and prepare sources of funding or sales of non-core assets.
- Cash below the obligations due: prepare a daily or weekly plan, separate out the payments that affect business operations, and seek legal advice on debts and directors' duties.
The number of signals at each level is a working guideline, not an academic standard. A seasonal business should compare against the same quarter of the previous year.
Talking to the bank before problems arise, with figures and a plan, usually opens up a wider range of options than waiting for the bank to call you in. However, prepare your information first, because the first question is usually when the money will run out and what you will do about it.
Why owners often see it late
The first obstacle is late reporting. If the March accounts are finished in May, the signals you see are from two months ago. The second is looking at averages. Total receivables may look normal while one large customer has started paying much more slowly. The third is habit. Owners who have been through a crisis before often believe they will get through this one the same way, without comparing how much their debt, fixed costs and customers have changed.
The last obstacle is that the people around the owner do not dare to say anything. The accounting team may know that several creditors have been deferred for months but not know whom to tell. The solution is to set thresholds in advance. Once a threshold is reached, the team has a duty to report without having to judge whether the owner wants to hear it. Written thresholds also help keep a discussion about problems focused on numbers, not on blaming individuals.
Next steps
- Fill in the past eight quarters of data for these six signals
- Set amber and red thresholds that suit your business
- Look at the trend over several periods; do not judge from a single period
- Have someone outside the operating team ask the questions, to reduce self-serving explanations
- Write the response plan in advance, including who decides what
- If several signals are red, start a weekly cash plan immediately without waiting for the accounts to close