Ten warning signs your business may be in financial trouble

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1 | Net ‘Potential Cash’ (what’s in the bank + what clients owe, less liabilities) falling to the equivalent of less than four months’ running costs.

2 | Total amount owed by clients amounting to more than the total of the last two months’ turnover (+VAT).

3 | More than 20% of business coming from just one client.

4 | Salaries (including regular dividends) totaling more than 60% of gross income (gross income being turnover less direct project costs).

5 | Overheads (excluding salaries) totalling more than 25% of gross income.

6 | Forecast of income from ‘known’ (confirmed) projects falling to less than the equivalent of three months’ running costs for the business.

7 | Total value of ‘prospective’ projects falling below the ‘norm’ for the business (this is usually measured at 5–10 times the monthly running costs, depending on type of business and previous history).

8 | Business owners’ personal financial commitments becoming unsustainable.

9 | Insufficient time being spent on business development (typically in a small–to– medium-sized business, business owners should be spending 25% of their time on developing business, rather than ‘project managing’).

10 | Failure to establish understandable financial reporting systems and frameworks, which can provide information daily, weekly, and monthly, to ensure timely decisions.

By Gary Baxter, DBA Expert, DBA Mentor and director of Lightbox Consulting, which specialises in advising creative businesses (lightboxconsulting.co.uk). Baxter has written a DBA guide on finance for designers, available to DBA members via dba.org.uk