It’s surprising how quickly a profitable business may slide into business distress. Often, this is due to external forces outside your control rather than your business’s management.
For example, perhaps you’ve lost a key client to a competitor, the market in which you operate has had a severe downturn, or you’ve incurred lousy debt as a result of a significant invoice that not paid.
This occurs because most businesses are concentrated on day-to-day operations and are unaware that something is wrong with the big picture.
Thus, when the hammer finally falls, everyone is taken aback and, of course, devastated.
While many business owners face obstacles during their careers, some clear signals indicate oncoming financial difficulties.
Recognizing these warning indicators also enables them to take timely corrective action to avoid disaster.
Regardless of the cause of your difficulties, you should be aware of early warning signals of an oncoming catastrophe.
The following list includes some of the details to be mindful of; nevertheless, their presence does not always mean that something is wrong with your business.
Indeed, some of these acts may be part of your overall business plan; it is when they occur unexpectedly or suddenly that you should take notice:
Cash Flow Issues
Cash flow issues are the destruction of many businesses, even ones that appear to be thriving on the surface.
Cash flow is not just about the amount of money that enters and exits the company; it is also about the timing of these transactions. Too many payments made at once, combined with delayed incoming payments, can bring operations to a halt.
If you’re having difficulty making timely payments to suppliers, employees, or Tax, the business may be experiencing cash flow difficulties. Since a company is often involved in various transactions, determining the source of this problem can be challenging.
Establish a daily routine of reviewing your incomings and outgoings; only by being aware of how money is leaving your business can you help limit the amount going and guarantee that everything that should be entering into the company’s accounts is coming in.
It makes no difference how many orders your business generates; if your customers do not compensate you for your efforts, you have an issue.
Late payments can have a significant negative impact on your cash flow and the longer bills remain unpaid, the less likely you will see the money at all. When pursuing late payers, be intense and persistent, and don’t hesitate to set tighter terms for future engagement with them.
For example, consider requiring a deposit or lowering the payment periods on your invoices.
Difficulties in getting a new business loan
One of the first signs of oncoming financial difficulty is the inability to get a loan or fresh round of financing.
If your most recent business loan application took far too long to process and ultimately denied, it may be time for some reflection within your SME.
Lenders employ quite thorough diligence procedures and may be able to identify issues that you may have overlooked. Occasionally, a lender, such as a bank, will inform you that everything is good and that you should apply for a business loan again in a few months.
This occurs because the lender does not wish to lose a potential customer with the expectation that you will resolve your business’s difficulties and then apply for a new loan. Therefore, never take verbal communication for granted, as it is not yet a binding promise.
Increase in your stock levels with low trading
If your incoming orders are decreasing and your inventory is increasing, this is a solid sign that something is wrong.
You must understand why this rapid shift occurred; are competitors undercutting you, are your services providing no longer what your clients want, or has the market changed?
Lack of investors
If you have attempted to sell your business via equity or direct buyouts and have been unsuccessful, this is another indication of financial and operational difficulties.
Similarly to financing, potential buyers conduct extensive due diligence and determine the value of a business using metrics that may differ from your internal estimates.
Additionally, a business owner may neglect the day-to-day operations of the company while looking for a buyer. This can negatively impact the immediate prospects of a sale and reduce the business’s value.
Looking for additional funding
While seeking funding may be a necessary component of an expansion or growth initiative, it may also signal that your business is not generating enough revenue to sustain itself.
Consider the reasons for your borrowing; this will frequently indicate whether or not this is a cause for concern.
Key staff leaving
The loss of an important employee or a significant contract signals changes and, with it, a step into the dark.
This is not necessarily a time to worry, but you should use caution while implementing these changes in your organization and closely monitor how they unfold.
For example, the new hire may integrate effortlessly into your organization, and you quickly negotiate a new, lucrative contract with another client.
However, suppose you cannot get a significant position or are having difficulty filling the vacancy left by a departing employee. In that case, you are encouraged to act quickly to resolve this issue.
Missing major milestones
Examining the last year or two of operations and conducting a fair comparison of where you should be against where you are may assist in detecting issues in sales, product development, supply chain management, and working capital financing, among other areas.
Whatever the case may be, you must develop a consistent strategy for resolving the issue, as investors, lenders, and buyers are rarely interested in excuses.
Accounts payable are above average.
Accounts payables are an excellent indicator of your business’s financial and operational health.
Accounts payable inform you of the status of your cash flow.
If they continue to accumulate, it indicates that you are not creating enough input to pay off the obligations, which is never a good sign.
Short operational runway
Finally, most businesses overestimate the amount of time they have to resolve issues. If your operational runway is less than six months old, this is a major red flag and may potentially signal the end of your business.
Six months of cash runway is the bare minimum you need to get things back on track; if your cash stock falls below that, it’s time to consider your options.
If your business shows any of these warning signs, your immediate attention should be on developing a backup strategy as early as feasible.
If your operations or supply chain are experiencing difficulties, it’s time to rap your teams on the knuckles. Reduce manufacturing costs, downsize your workforce, or hire experts to streamline your processes.
Suppose the issue is one of funding, and you are having difficulty raising new capital via the banking system. In that case, it will be time to consider the many forms of alternative funding accessible to small and medium-sized businesses.