1. Declining Operating Margins

If operating margins ( operating income divided by sales) are failing then is a sign of deteriorating performance. A rule of thumb is that if margins decline by 10 percent or more over a year then something is seriously wrong.

2. Falling Free Cash Flow

Some CFOs prefer to monitor free cash flow ( operating cash flow minus capital expenditure) rather than earning per share ( they believe it provides a more reliable performance indicator because it is harder to manipulate). Growing free cash flows indicate a healthy business that can pay its debt on time, reinvest in the business and pay dividends. Conversely, declining free cash flows suggest that the business is under increasing pressure and heading for tough times. There are exceptions to this rule if, for example, a major investment has just been made in growth capacity. But, more often than not, a trend line of failing free cash flow represents a major red flag.

3. Rising Net Income but falling operating cash flow

Operating cash flow (roughly translated as net income plus non-cash expenses such as depreciation) is another key figure to monitor. If it’s failing but net income is rising, thing might indicate that inventory or accounts receivable levels have risen.

4. Accounts receivable raising faster than sales

Receivables usually mirror sales. If sales grow faster than receivables, then it suggests that managers are performing well. But if the opposite happens, the CFO should be alert to potential problems including inefficient invoicing and collection processes, dissatisfied customers who are withholding payment, potential bad debts, and a business buying customers by offering over generous terms.

5. Rising Levels of debt

While there is nothing wrong with debt if cash flow is strong and improving, excessive levels of debt can turn a performance blip into a full-blown crisis. What is acceptable varies from industry to industry but a rule of thumb is to keep debt-to-equity ratio well under 1. When debt is rising at the same time as free cash flow is falling, the CFO should be on red alert.