8 financial warning signs in an SME
Financial problems rarely arrive all at once: they give warnings for months. These are the signs worth watching, and what to do when they appear.
When a company runs out of cash, there were almost always earlier signs that nobody looked at in time. Spotting them early is the difference between adjusting course calmly and making decisions in a rush.
1. You're selling more, but cash is flat or worse
Growth consumes cash: more stock, more receivables, more upfront costs. If sales rise and cash doesn't follow, growth is being financed with your own money or the bank's.
2. Customers are paying later and later
If your average collection period is creeping up month after month, you're financing your customers. Review who pays late, tighten terms and watch concentration: one large customer paying late can strain your whole cash position.
3. Credit lines are always maxed out
A credit line is meant to cover temporary gaps. If it's fully drawn all year round, it's no longer a cushion: it's permanent financing for losses or for working capital that's out of control.
4. You pay taxes or payroll with borrowed money
If you have to draw on a credit line or delay suppliers to pay quarterly VAT or extra salary payments, your cash flow forecast isn't working, or the business isn't generating the cash it needs.
5. Margins fall with no clear explanation
Cost increases that aren't passed on to prices, discounts that become the norm, or a loss-making business line hidden in the average. Without a P&L by business line or customer, it's hard to find the leak.
6. Stock grows faster than sales
A full warehouse is money standing still. If inventory grows faster than revenue, there's a risk of obsolescence and cash pressure.
7. Debt grows faster than EBITDA
If every year you need more debt to sustain the same activity, the business isn't generating enough cash. Banks look at net financial debt relative to EBITDA, and when it climbs, new financing gets harder.
8. You find out the results months later
If you only know how the year went when the accounts are filed, every sign above arrives too late. Without monthly information, decisions are made blind.
A legal warning worth knowing
In Spain, if accumulated losses reduce a company's equity below half of its share capital, company law treats it as grounds for dissolution unless it's corrected. It comes with deadlines and obligations for directors, so it's worth spotting early and discussing with your adviser.
What to do if several sound familiar
- Get the full picture: balance sheet, results, cash and working capital over recent years. A financial analysis identifies the real causes and prioritises actions.
- Build a 12-month cash flow forecast to know when and how much cash will be squeezed.
- Pull the cash levers: collections, payments, stock, prices and costs that don't add value.
- Set up monthly follow-up with KPIs and alerts, so it doesn't happen again.
If you'd like us to review your company's situation, tell us about your case in a free, no-obligation first meeting.