5 Balance Sheet Red Flags Every CEO Should Know
Discover the 5 key balance sheet red flags every CEO should watch. Spot early warning signs, protect cashflow, and strengthen your business’s financial health.
The balance sheet is one of the most underused resources in a growing business, not because CEOs don’t care, but because most of the time:
a) it’s not fully up to date (year-end journals, accruals, and adjustments all missing), and
b) no one has ever really explained what they should be looking for.
Last week I shared a simple breakdown of what a balance sheet actually is and how to read it (link to last week’s blog).
This week, we’re looking at something even more important:
👉 Which balance sheet changes should make you stop and pay attention and why.
Because red flags in the balance sheet often show up long before they hit the P&L.
Let’s dive in.
1. Debtors increasing (and you don’t know why)
An increase in debtors isn’t automatically a bad sign.
If revenue has grown, it might simply reflect increased sales.
But the question I always ask is:
“Are your debtor days increasing too?”
Debtor days strip out the noise.
They show how long (on average) it takes you to get paid and whether that’s improving or slipping.
Why this matters:
Debtors = your cash, stuck somewhere else
If debtor days rise, cash gets squeezed
More businesses fail from cashflow issues than poor profit
What to do:
Track debtor days monthly
Tighten credit control
Review payment terms
Follow up sooner, not later
2. Liabilities increasing month after month
A rising liabilities number shifts the entire balance sheet position.
It can be an early warning sign of:
poor cash management
costs running ahead of revenue
relying too heavily on credit to operate
early-stage trading trouble
This is often one of the first places strain shows.
What to do:
Review what’s driving the increase
Separate one-offs from sustained growth
Check whether short-term liabilities are covered by current assets
Build a plan to rebalance if needed
3. A Growing Director’s Loan Account (And No Clear Plan Around It)
This one catches so many CEOs out, especially those in fast-growing businesses who dip in and out of the company bank account without realising the long-term impact.
A rising Director’s Loan Account (DLA) balance usually means one of two things:
You’re withdrawing more from the business than the profits can actually support, or
You’ve paid business costs personally and not allocated them properly (common, but still a red flag if it keeps happening)
Why this matters:
An overdrawn DLA is essentially the business loaning you money, and that’s not sustainable.
HMRC do not love this, overdrawn DLAs can create unexpected tax charges.
It’s often a symptom of a deeper issue: either cashflow strain, pricing problems, or a lack of structured remuneration planning.
And most importantly, it reduces the long-term stability the balance sheet is trying to build.
What to do:
Review your remuneration strategy (salary/dividends/bonuses)
Ensure dividends are only taken when profitable
Log any personal payments accurately and regularly
Build a plan to reduce the DLA balance over time
Create a proper separation between “business money” and “your money”
A creeping DLA is rarely just an admin issue, it’s a sign the business and the CEO need a clearer, more predictable financial structure.
4. Stock value increasing without a clear reason
For stock-heavy businesses, rising stock isn’t always good news.
Like debtors, stock is just cash tied up.
If stock keeps growing but revenue doesn’t, something is off.
Risks:
overbuying
slow-moving or obsolete stock
inaccurate stock records (this is common!)
production/delivery bottlenecks
forecasting issues
What to do:
ensure regular stock takes
use independent checks periodically
review purchasing accuracy
compare stock levels to sales patterns
If stock is rising faster than sales, it’s a signal, not a coincidence.
5. Net assets flat or falling
Net assets is the single most important number on your balance sheet.
It tells you what your business is actually worth today after everything owed in and out is settled.
So if this number is:
dropping
flat for several periods
not growing in line with revenue
…that’s a sign of deeper issues.
It can mean:
profits are too low to build value
costs are rising faster than growth
liabilities are creeping up quietly
directors are withdrawing too much
cash reserves are shrinking
What to do:
compare net assets quarter by quarter
review profitability and cashflow
check debt levels
ensure the business is retaining enough value
This is your long-term resilience metric.
Final Thought
Your balance sheet doesn’t shout.
It whispers.
And when you understand what to listen for, you can spot problems long before they show up anywhere else.
These red flags don’t mean panic, they mean awareness.
And awareness is exactly what keeps businesses stable, investable and growing with confidence.
If you’d like help turning your balance sheet into something you actually understand (and can use), that’s exactly what we do at Corbar.
