Five accounting red flags your business should watch for

Most financial problems don’t begin with a dramatic crisis. They usually start with small issues buried in your accounts, often months before cashflow tightens or profits fall. These early accounting red flags can be easy to miss, but once you know what to watch for, you can act before they turn into something more serious.

Below are five of the most common accounting red flags and what they may be telling you about your business.

1. Your gross profit margin is falling

A declining gross profit margin is one of the clearest accounting red flags. You may feel busy, your sales may look strong but, if your margin is slipping, your business is working harder for less return. This often happens when supplier costs rise, prices remain unchanged, labour becomes more expensive, or stock control starts to weaken.

Even small drops in margin matter. Over a year, a one- or two-point decline can dramatically affect profit. The best way to tackle this is to review pricing regularly, check supplier agreements and monitor margins monthly through your management accounts. A consistent downward trend should never be ignored.

2. Customers are taking longer to pay

Rising debtor days are another major warning sign. Revenue only becomes real money when it lands in your bank account. Unfortunately, many businesses underestimate how much cash is tied up in outstanding invoices.

When customers take longer to pay, it can reflect their own cashflow issues. It may also indicate that your payment terms, credit control procedures or follow-up reminders are not as robust as they could be. Even a few late-paying clients can create significant pressure.

Strong credit control – supported by automated reminders and clear terms – can transform cashflow and reduce reliance on overdrafts. If your aged debtors list keeps growing, treat it as an accounting red flag that requires immediate attention.

3. Your Director’s Loan Account (DLA) is overdrawn

Many owner-managed businesses occasionally dip into the company account. However, a consistently overdrawn Director’s Loan Account (DLA) is a red flag that should never be ignored. It may indicate that the company cannot support the level of drawings being taken, or that dividends are being paid without sufficient profits.

An overdrawn DLA can also trigger a sizeable Section 455 (S455) tax charge and, if it becomes a pattern, HMRC may look more closely at your accounts. Addressing this usually involves reviewing your remuneration strategy, ensuring dividends are supported by profits and using a real-time dashboard in cloud accounting software to monitor drawings throughout the year rather than only at year-end.

4. Your costs are rising faster than your revenue

Every business experiences cost increases but, when overheads rise more quickly than turnover, profitability begins to shrink. Sometimes this is due to inflation, but often the real causes include unnoticed subscription creep, supplier price changes, staffing costs that have gradually increased or inefficient internal processes that develop as a business grows.

Regular cost reviews – ideally every quarter – can reveal patterns that are not visible when looking only at year-end accounts. Producing monthly management accounts and comparing them with previous periods helps you see whether rising costs are temporary or part of a more concerning trend. If your expenses are outpacing revenue, it is one of the most important accounting red flags to address.

5. Your financial information is late or incomplete

This final red flag underpins all the others. When bookkeeping is consistently behind, when VAT returns are rushed or when receipts are missing, the picture you have of your business becomes unreliable. It becomes difficult to know whether customers have paid, which suppliers are overdue or what your true cash position is.

Businesses operating without timely, accurate information tend to make reactive rather than strategic decisions. Moving to cloud bookkeeping, reconciling accounts regularly and storing receipts digitally all help to create real-time visibility. If you often feel unsure about your financial position, that uncertainty is an accounting red flag in itself.

What to do if you spot these accounting red flags

If you’ve recognised any of these accounting red flags in your own business, you’re not alone. Many issues we encounter during new client reviews could have been resolved earlier with the right systems and support.

THP can offer you a review of your accounts, processes or cashflow, helping you understand what’s working well and what could be improved. Early action leads to better decisions, stronger cashflow and a more resilient business. Get in touch with a friendly member of our team to learn more.