Cash flow problems: the warning signs, the causes, and how to find yours in Xero

Short answer: a business has a cash flow problem when the money coming in does not arrive in time to pay what is going out, even if it is making a profit. The early warning signs are in your numbers weeks before a bill bounces: the bank balance falls for three months in a row while profit holds up, customers take longer to pay (debtor days rising, more invoices past due), you pay suppliers later than you used to, the overdraft is used more and cleared less, tax bills arrive as a surprise, and the cash in the bank covers less than a month of outgoings. The cause is usually one of eight things, and Xero’s Aged Receivables, Aged Payables and Balance Sheet reports tell you which in about 15 minutes. Find the cause before cutting costs: most cash flow problems in profitable businesses are cash stuck in unpaid invoices, stock or repayments, not spending. (For the basics first, what is cash flow? explains positive and negative cash flow and when a negative month is fine.)

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The warning signs, and where each one shows in Xero

Warning sign	Where to see it in Xero	When to worry
Bank balance falling while profit holds up	The bank account on the Dashboard, against the Profit and Loss for the same months	Three month-ends in a row lower, with no one-off purchase to explain it
Customers paying more slowly	Aged Receivables Summary: the total, and the columns past 30 days	Debtor days up by a week or more on six months ago, or the overdue columns growing faster than sales
Paying suppliers later	Aged Payables Summary, overdue columns	You are choosing which bills to pay, or suppliers have started chasing
Overdraft used more	The bank account balance and the bank fees or interest account on the Profit and Loss	It no longer comes back to zero after customers pay
Tax bills feel like a shock	GST, VAT or PAYE lines in the liabilities on the Balance Sheet	The amount owed is more than the cash you could spare on the due date
Little cash cover	Bank balance against a normal month of money out	Less than about a month of outgoings, and falling
Owner not taking pay, or putting money in	Drawings, director’s loan or shareholder accounts on the Balance Sheet	It has happened more than once to cover wages or a tax bill
Stock building up	The inventory line on the Balance Sheet, against cost of sales	Stock days rising while sales are flat

One sign on its own is often seasonal. Two or three together, moving the same way for a quarter, is a pattern. To put a number on how long the cash lasts, use the free cash runway calculator; how many months of cash should a business have covers what a sensible buffer is for your kind of business.

A worked example: profit up 25%, bank down 64,000

These are made-up figures for a small UK commercial cleaning company that won a new office contract in May. All amounts exclude VAT to keep the sums simple, and depreciation is small enough to leave out.

	End of April (£)	End of June (£)	End of September (£)
Sales invoiced in the month	60,000	65,000	75,000
Net profit for the month	4,800	5,200	6,000
Owed by customers (debtors)	66,000	84,500	125,000
Debtor days (debtors ÷ month’s sales × 30)	33	39	50
Of which more than 30 days past due	4,000	12,000	31,000
Owed to suppliers (creditors)	18,000	21,000	33,000
Bank balance	85,000	62,000	21,000
A normal month of money out	56,000	61,000	70,000
Cash cover	1.5 months	1.0 month	0.3 months (about 9 days)

Sales and monthly profit both rose 25%, and the owner felt the business had its best half-year. The bank balance fell from £85,000 to £21,000. Profit from May to September added up to £27,600 (5,000 + 5,200 + 5,600 + 5,800 + 6,000), so where did £64,000 go?

Change from end of April to end of September	£
Profit, May to September	+27,600
More owed by customers (66,000 → 125,000)	−59,000
More owed to suppliers (18,000 → 33,000)	+15,000
Dividends to the director (5 × 4,000)	−20,000
Loan repayments (5 × 1,920)	−9,600
Last year’s corporation tax, paid in August	−18,000
Change in the bank	−64,000

The signs started showing by June, three months before the balance got tight:

• Debtors grew much faster than sales. Sales rose 25%; what customers owed rose 89%. About £30,000 of the extra £59,000 is the new contract, which pays at 60 days, so two months of it are always unpaid. Most of the rest is older customers paying later: the amount more than 30 days past due went from £4,000 to £31,000.
• The business was quietly borrowing from its suppliers. Creditors went up by £15,000. That kept the bank higher than it would have been, but it is cash that has to go out soon, so without it the balance would be £6,000.
• Dividends, repayments and tax used more than all the profit. £47,600 went out that never appears as a cost on the Profit and Loss.
• Cash cover fell from 1.5 months to 0.3. The next VAT payment or one slow month from the new client could leave wages unpaid.

The fix is not cutting costs. Getting debtor days back to 33 would bring in about £42,500 (75,000 × 17 ÷ 30), taking the bank back to around £63,500. That means chasing the £31,000 that is overdue, and asking the new client for 30-day terms or monthly billing in advance at the next renewal. Until debtors come down, the dividends should drop to what the bank can stand. Profit in Xero but no cash in the bank shows the same reconciliation for your own figures, step by step.

The eight usual causes

Cause	What you see in Xero	First thing to try
Customers paying slowly	Aged Receivables total and overdue columns growing; debtor days rising	Reminders, shorter terms, online payment, deposits. Who owes me money and Xero invoice reminders
Growth	Sales up, but debtors and stock up faster	Deposits or staged billing on big jobs; growing only as fast as cash allows. Working capital calculator; for builders, a construction cash flow projection
Too much stock	Inventory up while cost of sales is flat	Order closer to demand, clear slow lines. How to calculate stock days
Thin margins	Gross or net margin falling month after month	Prices first, then direct costs. Why did my profit drop and the price increase calculator
Overheads growing faster than sales	Operating expenses up as a share of sales	Find the line that grew most. Where is my money going
Tax not set aside	GST, VAT, PAYE or income tax owed on the Balance Sheet, bigger than the cash you could spare	Move the tax share of each payment to a separate account; talk to the tax office before the due date
Repayments and drawings above profit	Loans falling and drawings or dividends rising on the Balance Sheet, with the bank falling too	Size pay to cash, not profit. How much can I pay myself
Big purchases paid from cash	Fixed assets up on the Balance Sheet; a large one-off in the bank account	Finance long-lived equipment over its life, not out of this month’s cash

If the business is not making a profit at all, collecting faster only delays the problem. Start with margins and overheads. If it is profitable and still short of cash, the cause is almost always in the first three rows or the repayments row, and the profit but no cash checker runs the reconciliation on your figures.

Finding yours in Xero in 15 minutes

1. Is it profit or cash? Run the Profit and Loss for each of the last six months. If profit is steady or rising while the bank falls, it is a cash flow problem; if profit is falling too, start with why did my profit drop.
2. Compare two Balance Sheets. Run the Balance Sheet at the end of last month and six months earlier, side by side. The lines that moved most (debtors, stock, creditors, loans, tax owed, drawings or dividends) are where the cash went. Cash flow analysis for a small business shows how to add them up so they explain the whole fall in the bank. How to read a Balance Sheet in Xero explains each line.
3. Check who owes you. Run the Aged Receivables Summary. Work out debtor days with the free debtor days calculator and note the five biggest overdue amounts.
4. Check what you owe and when. Run the Aged Payables Summary, and add the next GST, VAT or PAYE payment and any loan repayments due in the next few weeks.
5. Look forward. Put the next few weeks of expected money in and out side by side. Xero’s short-term cash flow does the next 30 days from your invoices and bills; a 13-week cash flow forecast shows when the low point is. For a seasonal business, the free 12-month cash flow forecast template finds the lowest month of the year and downloads as a spreadsheet, and seasonal business cash flow shows how much to save in the busy months to cover it.

If cash is short this week

• Chase the biggest overdue invoices first, by phone. Five calls about the five largest amounts usually bring in more than a hundred reminder emails.
• Know the low point. List every payment due in the next four weeks against the money you expect in, week by week, so you know which week is the tight one.
• Talk to the tax office before the due date, not after. HMRC (Time to Pay), the ATO and Inland Revenue all offer payment arrangements, and asking early usually costs less than penalties. Can’t pay your BAS, GST or VAT on time? has the steps for each.
• Talk to the suppliers that matter. Agreeing a later date in advance keeps the relationship; going quiet does not.
• Pause drawings and dividends until the bank is back above a month of outgoings.
• Do not cover a cash gap with new expensive debt before you know the cause. If the cause is slow customers, an overdraft only hides it. If you do borrow, cash flow loans for small business shows how to work out the real cost and the size that clears the low point once repayments start.

If you cannot see how the business will pay its debts as they fall due, speak to your accountant quickly. Company directors in the UK, Australia and New Zealand have legal duties once a company is in that position.

Common questions

What are the signs of cash flow problems? The bank balance falling for several months while profit holds up, customers taking longer to pay, more invoices past due, paying suppliers late, using the overdraft more and clearing it less, tax bills that are hard to pay, and less than about a month of outgoings in the bank. Two or three of these moving the same way for a quarter is a pattern, not a bad month.

What causes cash flow problems in a small business? Usually one of eight things: customers paying slowly, growing faster than cash allows, too much stock, thin margins, overheads growing faster than sales, tax not set aside, loan repayments and drawings above profit, or big purchases paid straight from cash. In a profitable business it is most often unpaid invoices, stock or repayments.

Can a profitable business have cash flow problems? Yes, often. Profit counts a sale when it is invoiced, but cash only arrives when the customer pays. Loan repayments, drawings, dividends, stock and tax payments all take cash without showing as costs on the Profit and Loss. A growing business can make more profit every month and still run out of cash.

How do I fix cash flow problems? Find the cause first. If customers are paying slowly, chase overdue invoices, shorten terms and ask for deposits. If stock is building, order less. If margins are thin, look at prices before cutting costs. If repayments and drawings are bigger than profit, reduce them until the bank recovers. Then keep a weekly eye on cash so it does not happen again; managing cash flow sets out a 15-minute weekly routine.

How much cash should a small business keep in the bank? Enough to cover the gap between paying out and getting paid, plus a buffer for a slow month. For many small businesses that is one to three months of normal outgoings, and more for seasonal or project-based businesses. Less than about a month leaves no room for a late customer or a tax bill.

Is growth a cause of cash flow problems? It can be. More sales usually means paying for staff, materials or stock before the extra customers pay, so cash goes out sooner than it comes in. The faster the growth and the longer the payment terms, the bigger the gap. Deposits, staged billing and shorter terms on new contracts help.

How do I spot cash flow problems early in Xero? Watch the bank balance at each month end, the Aged Receivables total and its overdue columns, and the tax and loan lines on the Balance Sheet, and compare each with a few months earlier. Most problems show in those figures one to three months before a payment is missed.

Your cash, checked every Monday

ReportPilot reads your Xero figures and sends a short plain-English email every Monday: the cash in the bank against the end of last month, roughly how many months it lasts if it has been falling, money owed to you that is past due and by whom, and bills due in the next two weeks against your cash. It asks Xero for read-only access, and there is a 14-day free trial with no card.