Most business owners wait until they can’t make payroll to realize they have cash flow problems. By then, it’s too late for simple fixes.
But cash flow problems don’t appear overnight. They develop over months through measurable changes in your business metrics that most owners never track.
I’ve worked with Michigan businesses for four decades, and I can predict cash flow trouble 60-90 days before it hits by watching five specific warning signs. These aren’t feelings or hunches – they’re numbers you can measure.
If you’re tracking the right metrics, you’ll see the storm coming while you still have time to change course.
Why most owners miss these warning signs
Business owners focus on the wrong numbers. They watch sales revenue, which feels good but doesn’t predict cash flow. They celebrate big months while missing the subtle shifts that signal trouble ahead.
Cash flow problems are like heart attacks – the symptoms build gradually, but most people ignore them until the crisis hits. The difference is, business cash flow problems are completely preventable if you know what to watch for.
These five warning signs show up in your business metrics 2-3 months before you feel the cash flow pressure. By the time you’re scrambling to make payroll, these numbers have been flashing red for months.
The successful Michigan businesses I work with track these metrics monthly. They catch problems early and fix them before they become emergencies.
Warning sign #1: Your days sales outstanding jumps above 45
Days Sales Outstanding (DSO) measures how long customers take to pay you. Calculate it by dividing your accounts receivable by your daily sales.
Most healthy businesses collect payment in 30-40 days. When DSO creeps above 45 days, you’re entering dangerous territory. Above 60 days, you’re headed for a cash crisis.
Here’s why this matters: if your DSO increases from 35 to 50 days, you’re suddenly carrying 15 more days of revenue as unpaid receivables. For a business doing $100,000 monthly, that’s $50,000 more cash tied up in customer IOUs.
I recently worked with a medical practice where DSO had drifted from 28 days to 67 days over 18 months. The owner didn’t notice because revenue was growing. But insurance companies were paying slower, and patient payment plans were stretching longer. They needed $180,000 more working capital just to maintain the same cash flow they’d had two years earlier.
Track this monthly: Take your current accounts receivable balance and divide by your average daily sales over the past 90 days. If the number is trending upward, your cash flow will break within 60 days unless you fix collections.
Warning sign #2: Customer concentration exceeds 25%
This warning sign catches growing businesses by surprise. You land a big customer – maybe 30% or 40% of your revenue – and celebrate the growth. But concentrated revenue creates concentrated cash flow risk.
When one customer represents more than 25% of your revenue, their payment timing controls your cash flow. If they pay 30 days late, you miss payroll. If they dispute an invoice, you can’t pay rent. If they cancel next quarter’s orders, you’re finished.
I see this constantly with Michigan technology companies that land major contracts with large corporations. The contracts look great – $500,000 annually – until you realize the customer pays quarterly, 60 days after invoicing. Now you need $125,000 in working capital to service a contract that should be profitable.
Restaurant groups face the same problem with delivery platforms. When third-party delivery becomes 40% of your revenue, their payment schedule and fee changes control your cash flow more than your actual operations do.
Track this monthly: Calculate what percentage of your revenue comes from your top 3 customers. If any single customer exceeds 25%, or your top 3 exceed 60%, you have dangerous concentration that will create cash flow problems when they change their behavior.
Warning sign #3: Your inventory turns drop below industry average
Inventory turns measure how quickly you convert inventory into sales. Calculate it by dividing annual cost of goods sold by average inventory value.
Healthy businesses turn inventory 6-12 times annually depending on industry. When turns drop significantly below your industry average, cash gets trapped in unsold products, creating a slow-motion cash flow crisis.
This problem sneaks up on businesses because inventory feels like assets. You see $50,000 in inventory and think “we have $50,000 worth of product.” But if that inventory used to turn every 60 days and now turns every 120 days, you’ve doubled your working capital requirements without improving cash flow at all.
I worked with a retail business where inventory turns had dropped from 8x to 4x annually. The owner thought slow-moving inventory was a minor problem. In reality, they needed an extra $200,000 in cash to maintain the same sales level they’d had the previous year.
Service businesses face a similar issue with work-in-progress. When projects take longer to complete or bill, your labor and materials get trapped in unbilled work, creating the same cash flow drain as slow inventory.
Track this monthly: Calculate your inventory turns quarterly and compare to industry benchmarks. If you’re below average and the number is declining, you’re building a cash flow time bomb.
Warning sign #4: Your break-even point keeps rising
Break-even analysis shows how much revenue you need to cover all expenses. When break-even keeps rising despite stable operations, it signals expense creep that will eventually kill cash flow.
Many businesses experience gradual expense inflation – software subscriptions, insurance increases, small staff additions – without noticing the cumulative impact. Each expense seems reasonable individually, but collectively they push your break-even point higher every month.
This becomes dangerous because revenue fluctuates but expenses don’t. If your break-even point rises from $80,000 to $95,000 monthly, you need 19% higher revenue just to maintain the same cash position. When revenue dips, you immediately lose money instead of having cushion.
I recently worked with a professional services firm where break-even had risen 30% over two years through small additions – better software, additional staff, nicer office space. Revenue had grown 15%. The gap between revenue growth and expense growth was slowly draining cash reserves.
Track this monthly: Calculate your break-even point by dividing total fixed costs by gross margin percentage. If it’s rising faster than your average revenue growth, you’re heading toward cash flow problems during any revenue downturn.
Warning sign #5: Your cash conversion cycle exceeds 60 days
Cash conversion cycle measures how long it takes to convert business investments into collected cash. It combines days inventory outstanding, days sales outstanding, and days payable outstanding into one metric.
The formula: Days Inventory Outstanding + Days Sales Outstanding – Days Payable Outstanding = Cash Conversion Cycle
Healthy businesses convert cash in 30-45 days. When your cycle exceeds 60 days, you’re using too much working capital relative to your revenue. Above 90 days, you’re probably headed for a cash crisis.
This metric reveals timing mismatches that kill cash flow. Maybe you pay suppliers in 15 days, hold inventory for 45 days, and collect from customers in 60 days. Your cash conversion cycle is 90 days, meaning you need 3 months of working capital for every month of sales.
I worked with a manufacturing business where the cash conversion cycle had stretched to 95 days. They were profitable but constantly short of cash because they needed almost $300,000 in working capital to generate $100,000 in monthly sales.
Track this quarterly: Calculate each component and monitor trends. If your cash conversion cycle is lengthening, you need more working capital to maintain the same sales level.
What these warning signs predict
These five metrics don’t just warn about cash flow problems – they predict exactly when you’ll run out of money if trends continue.
Rising DSO means customer payments slow down, reducing weekly cash inflows.
Customer concentration means payment timing depends on fewer decision-makers, increasing volatility.
Declining inventory turns means more cash gets trapped in unsold products or unbilled work.
Rising break-even means you need higher revenue just to maintain current cash flow.
Lengthening cash conversion cycle means you need more working capital to generate the same revenue.
When multiple warning signs activate simultaneously, they compound each other. Rising DSO combined with declining inventory turns creates a cash flow perfect storm that can break even profitable businesses.
How to respond when you see warning signs
1-2 warning signs active: Implement monthly metric tracking and address the specific issues. Usually fixable with better collections, inventory management, or expense control.
3-4 warning signs active: You need systematic intervention within 30 days. This isn’t a DIY situation – the problems are interconnected and require comprehensive solutions.
All 5 warning signs active: Cash flow crisis likely within 45-60 days unless dramatic changes happen immediately. Emergency actions required.
The key is responding to metrics, not feelings. When DSO hits 50 days, fix collections regardless of how sales feel. When inventory turns drop below industry average, liquidate slow products regardless of how much you paid for them.
Michigan businesses and cash flow warning signs
Michigan businesses face unique pressures that make these warning signs more common and more dangerous.
Healthcare practices deal with insurance payment delays that steadily increase DSO. What used to be 35-day collections becomes 55-day collections as insurance companies slow payments and increase denials.
Technology companies often accept large customer concentrations to drive growth, not realizing they’re creating cash flow vulnerability when those customers change payment terms or delay projects.
Food service businesses see inventory turns decline when they add menu complexity or try to reduce stockouts, not realizing they’re tying up cash in slow-moving ingredients.
Professional services firms experience break-even creep as they add staff and technology to serve larger clients, not tracking whether revenue growth keeps pace with expense growth.
The Michigan businesses that thrive are the ones that track these metrics monthly and respond to numbers, not emotions.
The math behind cash flow prediction
Here’s why these warning signs work: they all measure cash timing and efficiency.
When DSO rises from 40 to 55 days, you need 37% more working capital to maintain the same cash flow. When inventory turns drop from 8x to 6x annually, you need 33% more cash tied up in products. When break-even rises 20%, you need 20% higher revenue to generate the same cash.
These aren’t small adjustments – they’re massive working capital requirements that most businesses can’t fund internally. The cash flow crisis happens when these requirements exceed available capital.
Business owners who track these metrics can see the cash requirements building months before they hit. They can arrange financing, fix operational issues, or adjust business models while they still have options.
Don’t wait for the crisis
Every successful Michigan business I work with learned to watch these warning signs after surviving at least one cash flow crisis. They wish they’d known about these metrics earlier.
The businesses that fail are usually profitable right until the end. They had good products, loyal customers, and growth potential. But they didn’t track the metrics that predict cash flow problems, so they couldn’t prevent them.
If you want to track these metrics but aren’t sure how to calculate them or what they mean for your specific business, I can help you set up simple tracking systems and interpret the results.
The initial consultation is free, and everything we discuss stays confidential. You’ll leave with a clear understanding of what these numbers mean for your business and what actions make sense.
(248) 957-0300
These warning signs exist for a reason. The question is whether you’ll start tracking them before they become problems, or after they’ve already broken your cash flow.
