5 Financial Red Flags Every Small Business Owner Should Watch

Most businesses don’t fail overnight.

They fail slowly — quietly eroding over months or years — until one day the erosion becomes visible and it’s too late to prevent collapse.

If you’re running a business doing $500K or more in annual revenue, the difference between recovery and collapse often comes down to one thing: early detection.

Financial distress announces itself through symptoms — measurable changes in your numbers that appear before crisis hits. But most small business owners don’t know what to look for, or they see the signs and convince themselves “it’ll get better next month.”

This article breaks down five of the most reliable early warning signs. These aren’t the problems themselves — they’re symptoms of underlying operational or strategic issues. But they’re measurable, and they appear early enough that you still have options.

If you’re seeing one, pay attention and investigate the cause. If you’re seeing three or more, take action immediately.

These aren’t academic concepts. They’re patterns I’ve seen repeatedly in distressed businesses. The owners who catch them early have options. The ones who don’t, don’t.

Before We Start: You’re Not Alone

If you’re reading this and recognizing your business in these patterns, you’re not behind — you’re paying attention.

Most of these issues are fixable, especially when caught early. The operators who get in real trouble aren’t the ones who see warning signs. They’re the ones who ignore them or don’t know what to look for.

I’ve seen businesses with all five red flags stabilize and recover. Early detection isn’t about avoiding problems — it’s about solving them while you still have options.

The fact that you’re here, reading this, means you’re already doing the work that matters: seeking clarity.

Quick Self-Assessment:

Check which of these apply to your business:

  • ☐ Gross margin declining 2+ quarters
  • ☐ Customers taking longer to pay
  • ☐ Using credit to cover payroll or rent
  • ☐ Paying some vendors late while others get paid quickly
  • ☐ Revenue growing but cash declining

1-2 checked: Pay attention and investigate
3+ checked: Read this article, then talk to your CPA

In This Article

Red Flag #1: Shrinking Gross Margin (Even as Revenue Grows)

What It Is

Gross margin — calculated as (Gross Profit ÷ Revenue) × 100 — measures what percentage of revenue remains after direct costs like materials and direct labor.

When gross margin shrinks, your direct costs are consuming more of each revenue dollar, leaving less to cover overhead, debt service, and owner compensation.

If this happens while revenue is growing, you’re working harder to make less money. More sales, lower profitability per sale.

Why It Happens

The most common causes are operational:

Material or labor costs increased but pricing didn’t adjust to match. A supplier raises prices 15%, but you don’t pass that through to customers. Your margin quietly compresses.

Labor inefficiency means taking more hours per job than estimated. You quote 20 hours, the work takes 30, and you eat the difference.

Product or service mix shifted toward lower-margin work. You’re winning more bids, but they’re the commodity jobs with thin margins. Your high-margin specialty work is declining as a percentage of total revenue.

Discount creep happens when small price concessions compound over time. A 5% discount here, waiving a fee there — individually minor, cumulatively significant.

Scope creep means doing more work for the same contracted price. “While we’re here” additions that don’t get billed.

Less common but legitimate: strategic entry into a new market with temporarily lower margins, or a planned investment in customer acquisition through loss-leader pricing.

The red flag is when margin erosion is unplanned and unexplained. You’re not sure why it’s happening or when it started.

Why It Matters

Gross margin is your first line of defense. Everything else — rent, admin salaries, insurance, taxes, debt payments — comes out of gross profit.

Consider this: A 5% gross margin decline on $500,000 in revenue equals $25,000 less gross profit available to cover fixed costs.

For many small businesses, that’s the difference between comfortable operations and monthly cash scrambles. That’s three months of rent. That’s half your insurance bill. That’s the buffer that kept you stable.

When gross margin erodes, you don’t just earn less profit. You lose operational flexibility. Unexpected expenses become crises. Seasonal slowdowns become existential threats.

What to Watch For

Watch for gross margin declining two or more quarters in a row. One bad quarter can be an anomaly. Two suggests a pattern.

Look for variance between estimated job costs and actual costs. If you consistently go over budget on materials or labor, your estimates are wrong or your execution is inefficient.

Compare revenue growth to gross profit growth. Revenue up 20% but gross profit only up 10% means your margin compressed.

Notice if new business is coming in at noticeably lower margins than existing work. If you’re winning work at 25% margin when your historical average is 40%, ask why.

Pay attention when individual jobs that “went over budget” stop being exceptions and become the norm.

What to Do About It

First, diagnose where the margin is going. Calculate gross margin by product line or service type — not just the blended average. One product subsidizing another is common, but you need to know which is which.

Then take corrective action based on what you find:

If it’s pricing: Raise prices on new work. Renegotiate renewals. Walk away from unprofitable opportunities. Most business owners underestimate how much pricing power they have.

If it’s costs: Renegotiate supplier terms. Find alternative vendors. Buy differently. Many suppliers will negotiate if you ask, especially if you’ve been a consistent customer.

If it’s labor: Fix the inefficiency. That might mean training, better processes, tighter scope definition, or simply being honest about how long work actually takes.

If it’s mix: Shift focus toward higher-margin work. Say no to low-margin opportunities. Fire customers who consistently demand discounts or scope expansion.

Don’t assume more volume will solve margin problems. It won’t. More low-margin work just means working harder to lose money faster.

We covered gross margin calculation and interpretation in detail in Part II: Understanding Margins. If these concepts are unclear, start there.

Red Flag #2: Lengthening Receivables Cycle

What It Is

Days Sales Outstanding (DSO) measures how long, on average, it takes to collect payment after earning revenue.

The formula is: (Accounts Receivable ÷ Annual Revenue) × 365

If your DSO is increasing, customers are taking longer to pay — which means more of your cash is tied up waiting for collection.

Why It Happens

Sometimes it’s your customers. They’re experiencing their own financial distress and paying everyone slower. When their cash gets tight, they stretch their payables. You’re one of those payables.

Sometimes it’s your processes. You invoice late. You don’t follow up. There are no consequences for late payment. Customers learn they can pay whenever it’s convenient for them.

Sometimes it’s concentration. One or two large customers whose payment habits dominate your receivables aging. If your biggest customer pays in 60 days, your overall DSO reflects that even if everyone else pays promptly.

Sometimes it’s industry norms shifting. What used to be Net 30 is now Net 45 or Net 60, and you’re accepting it because “that’s how everyone does it now.”

And sometimes it’s reluctance. You’re afraid to press for payment because you don’t want to damage the relationship. So you wait, and they keep paying late, and the pattern reinforces itself.

Why It Matters

Revenue on your P&L doesn’t pay bills. Cash does.

Here’s how the math works: If you bill $50,000 per month and collect payment in 30 days, you have roughly $50,000 tied up in accounts receivable at any given time.

If collection time stretches to 60 days, you now have $100,000 tied up in receivables.

That’s an additional $50,000 in working capital you must fund — either from reserves, credit, or by stretching your own payables to vendors.

Growth makes this worse. The faster you grow, the more cash you need to fund the expanding receivables balance. You can be winning more work, billing more revenue, and still running out of cash because it’s all trapped in receivables.

In short: Growth increases working capital requirements. If you can’t fund that requirement from operations or external capital, your bank balance shrinks despite profitability.

Industry Context Matters

Not all DSO is created equal. Industry norms vary significantly.

B2B businesses serving large corporations might have 45 to 60 day terms as standard practice. Government contractors often wait 60 to 90 days. Construction projects with progress billing can legitimately be 60-plus days.

Retail or consumer service businesses should be near-zero. Payment happens at delivery.

What matters isn’t the absolute number — it’s the trend and how it compares to your industry norm.

Construction at 60 days may be fine. Retail at 60 days is a crisis.

What to Watch For

Watch for DSO creeping from 30 days to 45 days to 60 days over several months. The slow erosion is more dangerous than a one-time spike because it suggests structural change.

Run an accounts receivable aging report monthly. Look at the buckets. If the amounts in “60 plus days” and “90 plus days” are growing, you have a collections problem.

Notice if you’re using your line of credit or credit cards to cover payroll. That’s a sign your cash is trapped in receivables when it should be available for operations.

Identify specific customers who consistently pay 30 to 60 days past terms. One or two slow payers can distort your entire cash position.

Watch if your total accounts receivable balance is growing faster than your revenue. That’s mathematical proof that collection times are lengthening.

What to Do About It

Start by running an accounts receivable aging report monthly. Any invoice over 60 days past due gets a phone call, not an email. Email is easy to ignore. Phone calls get answered.

Then tighten your credit policies:

Require deposits on new work, especially from new customers. Even 25% upfront changes the cash dynamic significantly.

Shorten payment terms where possible. Move from Net 30 to Net 15. Not all customers will accept it, but more will than you expect.

Charge late fees and actually enforce them. Most businesses have late fee clauses in their terms but never charge them. Start. It changes behavior.

Stop extending credit to chronic late payers. Move them to prepay or COD. If they won’t accept those terms, they’re not the right customer.

For large customers, negotiate progress payments or milestone billing instead of payment on completion. Break a $50,000 project into five $10,000 milestones and collect as you go.

Your bookkeeper can calculate DSO for you. If you don’t know your current number, calculate it this week.

This is the reverse of customer deposits — revenue earned but cash not yet collected. We covered this timing issue in Part III: Cash vs Revenue.

Red Flag #3: Using Credit for Operations

What It Is

Using lines of credit, credit cards, or other borrowing to cover regular operating expenses — payroll, rent, utilities, inventory — rather than funding expansion, equipment purchases, or bridging a specific, temporary gap.

Why It Happens

The most common cause is cash flow timing mismatch. You pay vendors and employees before customers pay you. The gap between cash out and cash in gets funded by credit.

Sometimes it’s seasonal. Revenue drops in winter, picks up in summer. You use credit to smooth the cash cycle between slow and strong periods.

Sometimes it’s slow-paying customers. Your receivables are growing (see Red Flag #2) and you’re using credit to cover the cash that’s tied up waiting for collection.

Sometimes it’s declining profitability being masked by debt. Revenue minus expenses is negative, but you’re borrowing to cover the shortfall. The P&L looks survivable, but only because debt is filling the gap.

Sometimes it’s growth consuming working capital faster than operations generate it. You’re expanding, which requires more inventory, more labor, more everything — before the revenue from that expansion arrives.

And sometimes it’s prior period losses that depleted cash reserves. You had a bad quarter or two, spent your savings, and now you’re operating on credit because the buffer is gone.

Why It Matters

Not all debt is bad. The question is: what are you using it for?

Strategic debt has a purpose: Equipment purchase that generates future revenue. Bridge financing for a large project with delayed payment. Seasonal working capital that gets repaid within 90 days from peak season cash flow.

Survival debt is different: Payroll funded by credit card. Rent paid from line of credit. Using new credit to pay minimum payments on old credit. Line of credit balance that never decreases.

Strategic debt is a tool. Survival debt is a symptom of insufficient cash generation.

Lines of credit at 10 to 12 percent interest used to fund chronic losses compound the problem. You’re now servicing debt with money you don’t have, which requires more debt. The spiral tightens.

The Critical Test

Can you pay down the borrowed amount within 90 days from operating cash flow?

If yes: You’re using credit as a working capital tool. This is appropriate use.

If no: You’re using debt to cover ongoing shortfalls. This is a red flag.

Ninety days is the threshold because it represents one business cycle for most companies. If you can’t generate enough cash in one cycle to repay what you borrowed, you’re not bridging a gap — you’re funding a structural deficit.

Industry Context

Seasonal businesses often use lines of credit to smooth cash timing between slow and strong periods. A landscaping company draws on credit in winter and pays it down in summer. A retailer borrows to buy holiday inventory in October and repays from November and December sales.

The difference between seasonal use and structural problems is the pattern:

Seasonal: Line of credit drawn in winter, paid down in summer. Predictable and cyclical.

Structural: Line of credit drawn continuously. Balance never decreases, or decreases only temporarily before climbing again.

If your business isn’t seasonal but your line of credit usage looks seasonal — borrowing every month, repaying never — that’s the red flag.

What to Watch For

Watch for line of credit balance that never decreases. Or it drops briefly, then climbs back to the previous high within weeks.

Notice credit card balances carried month-to-month and growing. Credit cards should be paid in full monthly. If they’re not, you’re using expensive debt for operations.

Pay attention if you’re using one credit source to make payments on another. Paying the credit card from the line of credit. Paying the line from another card. This is the beginning of the spiral.

See if payroll is being funded by anything other than operating cash. If you’re charging payroll to a credit card or drawing from the line to make payroll, you don’t have enough operating cash.

Notice if you’re surprised by how high your interest expense has become. That’s a sign you’ve normalized carrying debt and stopped tracking the cost.

Watch for your lender asking questions about your use of the line. They have access to your account activity. If they’re calling to “check in,” they’ve noticed a pattern.

What to Do About It

First, distinguish between timing problems and structural problems.

If it’s timing — a slow customer payment, a seasonal lull — your focus should be bridge financing and improving collections. You need to close the gap between when you pay costs and when you collect revenue.

If it’s structural — revenue doesn’t cover expenses — credit is masking a profitability problem. Borrowing more won’t fix it. You need operational changes.

Take immediate action if you’re using credit for survival:

Build a 13-week cash flow forecast. You need to see exactly where cash is going, when obligations hit, and where the gaps are. Without visibility, you’re guessing.

Identify the root cause. Is it margin compression? Slow collections? Overhead too high? Growth outpacing available capital? You can’t fix what you haven’t diagnosed.

Cut discretionary spending immediately. Not next month. Now. If you’re borrowing to operate, you don’t have the cash for anything non-essential.

Don’t take on new work that requires upfront cash you don’t have. If you can’t afford to buy the materials or pay the labor, don’t bid the job. Taking unprofitable work makes the problem worse.

Talk to your banker before they call you. If your line of credit balance has been climbing for more than two quarters, they’ve noticed. Proactive communication preserves the relationship and keeps options open.

If the line of credit balance is growing for more than two quarters, get professional help. This rarely resolves on its own. The pattern suggests a gap between revenue and expenses that operations can’t close without intervention.

Red Flag #4: Selective Vendor Payments

What It Is

Paying new vendors on time or COD while stretching payment to established vendors — often 60, 90, or 120-plus days past terms.

This is sometimes called “vendor roulette” — deciding each cycle which vendors get paid and which get pushed.

Why It Happens

The cause is simple: not enough cash to pay everyone on time.

New vendors don’t extend credit until they know you. They require prepayment or COD until the relationship is established. Established vendors have been patient and accommodating — until they’re not.

The path of least resistance is to pay the new vendor demanding immediate payment and stretch the old vendor who hasn’t yet put you on hold.

But that’s a short-term solution that creates a long-term problem.

Why It Matters

This pattern is visible to everyone involved, and it signals cash distress.

Vendors talk to each other — especially in tight-knit industries. They see the pattern. They recognize the signs. Word spreads.

And when vendors realize you’re managing cash flow by prioritizing some payables over others, they respond:

They tighten payment terms. Net 30 becomes Net 15 becomes COD.

They raise prices to compensate for payment risk. If they think there’s a chance they won’t get paid, they build that risk into their pricing.

They stop extending credit entirely. You’re moved to prepay-only status.

They place your account on hold. No new orders until the current balance is paid.

They refer you to collections or pursue legal action.

Once vendors move you to COD-only terms, your cash problem gets worse. Now you’re funding even more working capital upfront, before you can collect from your customers. The gap widens.

What to Watch For

Look for the pattern: paying some vendors in 15 days, others in 90-plus days.

Notice when vendors start calling or emailing about overdue invoices. If they’re reaching out, you’re past due enough that they’re concerned.

Check your accounting system for multiple vendors showing “past due” status or on “credit hold.”

Pay attention when you’re promising payment dates you know you can’t keep. If you’re buying time with promises, the situation is worse than you’re admitting.

Watch for rotating which vendors get paid each month based on who’s complaining loudest rather than strategic priority.

Run an accounts payable aging report. If you have significant balances in the “60 plus days” and “90 plus days” buckets, you’re not managing payables — you’re in distress.

What to Do About It

If you’re here, you need a plan — not just for this month, but for the next six months.

Step 1: Communicate proactively

Don’t wait for vendors to call you. Call them first.

The conversation is simple: “We’re managing through a cash timing issue. I want you to know when you can expect payment and that we’re committed to getting current.”

This doesn’t solve the cash problem. But it preserves relationships and buys goodwill. Vendors who hear from you before they have to chase you are far more patient than vendors who feel ignored.

Step 2: Prioritize strategically

Not all vendors are equal. Categorize them:

Critical: You can’t operate without them. These get paid first, even if it’s partial payment to keep the account active.

Important: Needed regularly but not daily. These get paid second. If necessary, negotiate payment plans.

Discretionary: Services or supplies you can pause temporarily. These wait, or you stop ordering until you’re current.

Step 3: Negotiate payment plans

Many vendors will accept structured payment plans if you ask before becoming severely delinquent and if you make consistent payments, even if they’re smaller than the full amount owed, and if you’re honest about the situation.

A vendor would rather get paid over time than not get paid at all. But you have to ask before you’re 120 days past due. By that point, goodwill is gone.

Step 4: Stop making the problem worse

If you can’t afford to pay for work you’ve already completed, don’t bid new work that requires the same vendors upfront.

Taking on new projects that deepen vendor debt is a sign you’re past the point of self-correction. You’re borrowing from one project to fund another, and eventually the chain breaks.

Step 5: Address the root problem

Selective vendor payment is a symptom. The root cause is insufficient cash generation relative to your obligations.

You need one of these interventions:

A working capital injection — equity from owners, capital from investors, or new debt specifically to clear vendor arrears and reset relationships.

Operational fixes — margin improvement, faster collections, overhead reduction. Changes that increase the cash your business generates.

Strategic changes — different customers, different services, different markets. Fundamental shifts in who you serve and how.

Or professional restructuring help — someone who can negotiate with vendors, build a sustainable payment plan, and manage the workout.

This rarely resolves without one of those interventions. Hoping it gets better isn’t a plan.

Red Flag #5: Revenue Growth with Declining Cash

What It Is

Your profit and loss statement shows increasing revenue and profit, but your bank balance is shrinking. You’re “profitable” on paper but broke in reality.

This is one of the most deceptive patterns because the income statement looks fine — sometimes even great.

Why It Happens

The fundamental issue is the cash conversion cycle. You pay for labor and materials before you collect from customers. Growth means you’re funding larger and larger working capital balances.

Specific causes include:

Accounts receivable growing faster than revenue. You’re billing more, but collection times are lengthening (see Red Flag #2). The cash is trapped in receivables.

Inventory purchases to support higher sales volume. Manufacturing or wholesale businesses have to buy inventory before they sell it. More sales means more inventory investment.

Customer deposits being spent before work is performed. You treat the deposit as revenue and spend it on operations, but under GAAP it’s a liability until the work is complete. This creates an artificial sense of available cash.

Owner distributions taken based on accrual profit, not cash profit. The P&L shows $100,000 profit, so the owner takes $50,000 in distributions. But the cash isn’t there because it’s tied up in receivables or inventory.

Capital expenditures consuming cash. You bought equipment, vehicles, or made facility improvements. These don’t show up on the P&L as expenses (they’re balance sheet transactions), but they drain cash.

Debt principal payments. Your P&L shows the interest expense, but not the principal payments. If you’re paying down $5,000 per month in principal, that’s $60,000 per year of cash outflow not visible on the income statement.

Why It Matters

Banks don’t care about accrual profit. Payroll doesn’t clear with “accounts receivable.” Vendors don’t accept “we’re profitable” as payment.

Growth can kill an undercapitalized business even when every individual job is profitable.

Here’s how it works: A contractor grows revenue from $1 million to $1.5 million — 50% growth. Gross margin stays healthy at 40%.

But during that growth:

Accounts receivable grows from $80,000 to $150,000. That’s $70,000 more cash tied up.

Inventory and materials on hand grow from $30,000 to $50,000. Another $20,000 tied up.

Work in progress grows from $40,000 to $70,000. Another $30,000 tied up.

Total: $120,000 additional working capital required to support the growth.

If the business only generated $60,000 in net profit during that growth period, the bank balance still declined by $60,000 despite being “profitable.”

This is why fast-growing businesses often face cash crises. The growth itself consumes more cash than the profit generates.

Industry Context: Working Capital Intensity Varies

Not all businesses consume working capital equally during growth.

Low working capital intensity (easier to self-fund growth):

Software as a service and subscription businesses collect monthly or annually and have minimal cost of goods sold. Most revenue converts to cash quickly.

Cash retail businesses collect payment at point of sale and carry low inventory relative to sales. Cash turns over quickly.

Professional services with low materials cost and fast billing cycles. You bill for labor, collect within 30 days, and have minimal capital tied up.

High working capital intensity (growth strains cash):

Manufacturing requires buying raw materials, holding work in process, and often extending payment terms to customers. Cash is tied up at every stage.

Construction pays for materials and labor upfront, then waits for progress payments or payment on completion. The gap can be 60 to 90 days.

Wholesale and distribution businesses buy inventory before selling it. More sales means proportionally more inventory investment.

Project-based services with long delivery cycles invoice on completion but incur costs throughout the project duration.

Know which type you are. High working capital businesses cannot self-fund rapid growth without external capital. The math doesn’t work.

What to Watch For

Notice when revenue is increasing 20 to 30 percent but your bank balance is flat or declining. That’s the first signal.

Watch if you’re needing to borrow to fund growth. Using your line of credit more heavily during a growth period suggests the growth is consuming cash faster than operations generate it.

Pay attention when you have a profitable quarter but find yourself scrambling for payroll the next month. That disconnect between profit and cash is the symptom.

Check if your accounts receivable balance is growing faster than your revenue. That’s mathematical proof you’re tying up more cash in receivables per dollar of revenue.

See if inventory or work-in-progress is ballooning. These are assets on your balance sheet, but they’re cash you can’t spend until they convert to sales and collections.

Notice if you’re surprised by the cash shortage despite strong sales. Surprise means you didn’t anticipate the working capital requirement of growth.

What to Do About It

Start by understanding your cash conversion cycle. How many days pass between paying for materials and labor (cash out), completing the work (revenue recognized), and collecting payment (cash in)?

The longer this cycle, the more working capital growth consumes.

Calculate your working capital requirement for growth. If your cash conversion cycle is 60 days and monthly revenue is $100,000, you need roughly $200,000 in working capital to operate. Growing to $150,000 per month means you need $300,000. That’s $100,000 additional capital required — even if every sale is profitable.

Then choose appropriate solutions for your situation:

Slow growth to match available capital. This is counterintuitive but sometimes necessary. Growing at 20% instead of 50% might keep you solvent.

Raise capital specifically to fund working capital. Equity from owners, capital from investors, or a working capital line of credit. Growth capital isn’t the same as operating capital.

Improve collections to shorten the receivables cycle. Every day you reduce DSO is cash freed up. Moving from 45-day to 30-day collections can unlock significant cash.

Negotiate better vendor terms to extend payables. If you can pay vendors in 45 days instead of 30, that’s 15 days of additional float. But don’t abuse this — it can trigger Red Flag #4.

Require customer deposits, especially on large projects. Even 25% upfront changes the working capital dynamic significantly.

Focus on faster-paying customers, even if margins are slightly lower. A 35% margin job that pays in 15 days may be better for cash than a 40% margin job that pays in 60 days.

Reduce inventory levels by tightening just-in-time ordering. Carrying less inventory ties up less cash, though this increases supply chain risk.

The most dangerous phrase in small business: “We’ll grow our way out of this cash problem.”

You can’t. Growth without working capital isn’t growth — it’s a trap. More sales just accelerates the consumption of cash you don’t have.

False Positive Warning

A business making planned capital investments — new equipment, facility expansion, acquisition — will show declining cash despite profitability.

This isn’t distress if it’s strategic and funded appropriately. You knew the investment was coming, planned for it, and chose to deploy cash this way.

The red flag is when declining cash during growth is a surprise. That means you didn’t anticipate the working capital requirement, and you’re now discovering it in real time.

This is the principle from Part III: Cash vs Revenue operating at scale during growth. Profit is an accounting concept measured by revenue and expenses. Cash is operational reality measured by inflows and outflows on different timelines.

What Multiple Red Flags Mean

Seeing one red flag? Pay attention. Investigate the cause. Most single issues can be addressed with operational adjustments.

Seeing two red flags? This is early warning territory. Address both issues within 30 to 60 days. Talk to your CPA or bookkeeper to verify your diagnosis.

Seeing three or more red flags? You’re likely in early-stage financial distress. Early-stage is manageable — you still have options, time, and creditor goodwill. But you probably need outside help to diagnose root causes and build a correction plan.

Seeing all five red flags? This requires immediate professional attention. The window for self-correction has likely closed.

Context matters. A seasonal business with temporarily high line of credit usage isn’t the same as a year-round business with the same pattern. Look for persistent trends, not isolated events.

The good news: Early-stage distress is manageable. You still have options, time, and leverage with creditors and vendors.

The bad news: Ignoring these signals doesn’t make them go away. It just reduces your options and compresses your timeline.

Next Steps

If you’re seeing warning signs:

1. Get clear on cash

Build a 13-week cash flow forecast. Understand exactly where cash is going, when obligations hit, and where the squeeze points are.

I’ll cover how to build one in a future article.

2. Calculate your key metrics

Calculate gross margin by product or service line, not just blended average. Calculate Days Sales Outstanding. Calculate your current ratio (Current Assets divided by Current Liabilities).

Know your numbers. You can’t manage what you don’t measure.

3. Communicate early

If you’re heading toward trouble, talk to your banker, CPA, and key vendors before you’re in crisis.

Early communication preserves relationships, buys goodwill and patience, and creates options like payment plans, term extensions, or workout agreements.

Late communication — or no communication — eliminates options.

4. Get professional help when you need it

There’s a myth that bringing in outside help means you’ve failed. The opposite is true.

Successful operators know when they need expertise they don’t have. The best outcomes happen when help arrives early — when there’s still cash, options, and time.

Types of help that address these issues:

Fractional controller or interim CFO restores financial visibility, builds forecasts, and cleans up books.

Turnaround consultant diagnoses root causes, builds stabilization plans, and manages stakeholder communication.

CPA or financial advisor models scenarios, advises on tax implications, and guides structural decisions.

Business attorney navigates creditor negotiations, restructuring options, and legal exposure.

The earlier you involve professionals, the more options you have and the less expensive the solutions become.

If you’re seeing three or more red flags, talk to your CPA first. If you don’t have one, find a CPA or fractional controller who specializes in small business or turnaround work. They can help you assess severity and build a plan.

5. Be honest about the root cause

These red flags are symptoms. The actual problems are usually operational (inefficiency, poor pricing, weak cost controls), strategic (wrong customers, wrong markets, wrong services), capital structure (undercapitalized for your business model), or management (poor financial visibility, delayed decision-making).

Treating symptoms without addressing root causes doesn’t work.

What Professional Help Actually Involves

If you’re seeing multiple red flags and decide to bring in outside help, here’s what typically happens:

Initial assessment (one to two weeks):

A professional reviews your financials, cash position, and key ratios. They identify which symptoms are urgent and which are root causes. They build a 13-week cash flow forecast if you don’t have one. They assess your timeline and the severity of the situation.

Action plan development (one week):

They prioritize issues by urgency and impact. They identify immediate actions — collections efforts, cost reductions, vendor conversations. They map a 90-day stabilization roadmap. They determine if you need additional specialists like legal counsel, banking advisors, or restructuring consultants.

Implementation support (varies by situation):

This phase includes weekly cash forecasting and monitoring, stakeholder communication with your bank, vendors, and team, building financial reporting and visibility systems, and making adjustments as the situation evolves.

Most fractional engagements are temporary — three to six months to stabilize operations and restore clarity. The goal isn’t permanent outsourcing. It’s to get you back to running the business with clear numbers and solid footing.

Related Resources

Build your foundation:

The ABC’s of Financial Literacy: Part I — Revenue, COGS, and profit

The ABC’s of Financial Literacy: Part II — Understanding margins

The ABC’s of Financial Literacy: Part III — Cash vs accrual accounting

Need guidance?

Talk to your CPA or a fractional controller with small business or turnaround experience. Early intervention creates options that don’t exist later.

For Advisors: If your client is showing three or more of these red flags, they likely need controller-level support or turnaround guidance beyond typical bookkeeping. Early professional intervention — fractional controller, interim CFO, or turnaround consultant — significantly improves outcomes compared to waiting until crisis. Feel free to share this article with clients who need a framework for self-assessment.

Conclusion

Financial distress is progressive. It moves through predictable stages, and it announces itself through measurable symptoms.

The businesses that navigate distress successfully recognize these symptoms early and address them while options still exist.

The five red flags in this article aren’t guarantees of failure — they’re early warnings. And early warnings, when heeded, give you time to course-correct.

Pay attention to your numbers. They’re telling you a story.