How to do a cash flow health check

Step 1 — check your cash buffer

Start with the simplest question: how many months of fixed costs would your current cash cover with no income? Under three months is a concern; under one is a warning. This single number, your cash buffer in months, is the fastest read on resilience. See how to build a cash buffer if it is thin.

Step 2 — look at the trend, not just today

A snapshot can mislead; the trend tells the truth. Is your monthly low-point balance rising or falling over the last six months? Are your debtor days creeping up? Is the overdraft used more or less than a year ago? Direction matters more than any single figure — a business with modest cash but improving trends is healthier than one with more cash but sliding. See cash flow red flags.

Step 3 — check the liquidity ratios

Calculate your current and quick ratios. A current ratio comfortably above 1 and a quick ratio near 1 suggest you can meet short-term obligations. Read them against your sector, and note whether they are improving or deteriorating over successive periods. These give an objective, comparable read on liquidity.

Step 4 — stress-test a bad month

Ask the uncomfortable questions: what if your biggest customer paid 30 days late? What if sales dropped 20% for a quarter? What if a large unexpected bill landed? Run each through your forecast and see whether you would cope. A business that survives its stress tests comfortably is genuinely healthy; one that fails them has work to do before the test comes for real.

Step 5 — act on what you find

Turn findings into actions: rebuild a thin buffer, tighten credit control if debtor days are rising, or arrange standby headroom if the stress tests worry you. Fixing a small cash issue found in a calm health check is far cheaper than fixing a crisis.

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