Waking to a failed business can be very frustrating. However, there are various warning signs of trouble that could help you take the necessary measures before it’s too late.
Gaining a better understanding of your business’s financial performance will help you notice developing trends before a crisis takes place.
Here are some red flags to respond to before your business goes under.
1. Low Cash flow
If you lack cash, you can’t meet your bill payments. The same applies for businesses. You must recognize how well your business manages its cash and you can’t do this by simply examining the income statement and balance sheet.
Neither of these statements reveals what’s really happening with cash. The only way to check out your cash situation is through the cash flow statement. Periods of flat revenue growth can produce a negative cash flow. You require a stable stream of profit to enable reinvestment in new equipment, technology, or project development.
After a while, you might discover you’re in a double bind. You aren’t generating sufficient cash to finance any meaningful growth and the lack of profits may hinder borrowing.
If you’re at this point, you may consider seeking funds from external investors though you may have to relinquish some control to obtain the necessary capital. You may also consider selling assets to raise funds though this is risky.
2. Unpaid Taxes
If you fall behind tax payments, you’ll incur an interest charge on the amount, which could increase your tax debt. Furthermore, the failure to devise a repayment arrangement or make payments could lead to legal action or even bankruptcy.
Unpaid taxes typically results in a financial burden, which grows very rapidly especially if you don’t file unpaid returns. Besides paying tax penalties, you also face the likelihood of personal liability.
3. Increasing Debts
One of the major indications of distress is the constant incapacity to pay off debts. Borrowing excessively to maintain operations or fund new activities can be a red flag. It could indicate future problems for your business, particularly amid rising interest rates.
Debt can overburden your business, making it hard to fulfill its obligations, ultimately resulting in bankruptcy. In this case, compare your debt ratios with companies in a similar industry to establish whether your business is worse than your competitors are.
If you’re facing increasing debt, perhaps you should consider ways of improving your cash flow. Some of the strategies include:
- Preparing weekly forecasts to understand what you’ve paid
- Sell excess or old stock
- Contact your bank about placing a temporary loan for instance an overdraft
4. Poor Profitability
Profitability is the major objective of every business venture. Without it, your business won’t survive in the long run. In a competitive business environment, you must learn to attain a satisfactory profitability level.
Enhancing profitability involves establishing the areas that are effective and those that require improvement.
If you’re experiencing a decline in profit, your business could be spiraling downward. It’s imperative you monitor profit and spot issues regularly. You should consider areas including:
Net and Gross Margins
Examine your stock costs and review expenditures regularly.
Price setting is a major aspect in determining profit. Therefore, careful analysis is essential in establishing the accurate pricing strategy for your business. You must examine what your competitors are charging and establish the price that would maximize profits.
This is an important factor in establishing profitability. It’s important you determine whether you’ve implemented measures to maintain and draw new customers.
5. Insufficient Financial Records
Financial records are your business’s backbone and it’s vital you update them and monitor them regularly to ensure efficiency. Ensure you enter your payments and invoices into your financial system on a weekly basis. You should also evaluate your loss and profit statement monthly.
When running a business, the ultimate indication of financial distress is typically running out of cash. However, you should also pay attention to other vital warning signs that could affect your business considerably.
Dailey Bookkeeping Services is a Xero Certified Bronze Partner and a QuickBooks Online Certified Advisor, so if we can help you with your accounting needs, just give us a call, we would love to help you! The owner, Jacqueline Dailey is a Certified Public Bookkeeper, an Advanced Certified QuickBooks and QuickBooks Online ProAdvisor, a Sleeter Group Certified QuickBooks Consultant and a Xero Certified Bronze Partner. We work remotely so we can work with any company located in the U.S. If we can help you with this process or provide you with custom reporting, please give us a call. If we cannot help you, we will refer you to someone who can! Feel free to visit our website at http://www.