Running a business can be an exciting way to pursue your vision, but it’s also one of the hardest vocations, with a high rate of failure over time. Whether you’re a business owner, company director or financial manager, you might be directly responsible for keeping your business out of financial trouble. So, what are the top signs your business could be at risk of joining the hundreds of Australian businesses that collapse each year?
1. Inability to pay bills on time
If your business is having trouble paying bills and fulfilling its debt obligations on time, you could be headed for financial trouble – or you could already be there. Defaulting on your bills and debt repayments or delaying payment suggests you’re underfunded and might already be insolvent. Keep in mind that if your business is trading while insolvent and accumulating further debt, the company directors could be at risk of civil and criminal penalties relating to insolvent trading.
2. Losing major clients
Losing one or two major clients might not seem like a big deal if you have dozens of major customers. However, as the months pass, the reduced revenue can start to impact your cash flow and balance sheet if you haven’t secured new customers or otherwise boosted your sales.
3. Reduced transparency on financial results
Another significant indicator of impending financial trouble is when you stop letting key staff know about your financial results. When you find yourself playing down financial data rather than sharing success stories with staff, it could be time to take a long, hard look at your business finances and get the help of advisors to review your financial strategy.
4. Sinking profitability
Falling margins and declining profitability are other top signs of financial trouble for businesses. Profits rather than sales have the greatest impact on viability and long-term feasibility of your business. If your costs are eating away at your margins, your business could be on a downward spiral and it could be time to review costs, pricing, sales, and marketing to stop the decline.
5. No access to finance
If you can’t access finance when you need it, this could be a clear indication of a business headed for financial trouble. Having a line of credit or other finance facility in place can tide you over and support smooth operations across your cash flow cycle. When your financial situation is more stable, it can be a sustainable, sensible way to finance growth. Get in touch with your lender and try to set up appropriate finance so you have something to fall back on.
6. Underperforming functions and operations
Are your functions or departments and operations performing below expectations? This could be another sign your business is headed for (or already in) financial stress. Poor financial outcomes are often (though not always) linked to poor management outcomes like underperforming functions and operations. Restructuring could address these weaknesses and drive efficiency gains.
7. Poor cash flow health
Poor cash flow health can result from inadequate account receivables management, lack of cash flow budgeting, too much cash tied up in inventory, and low profit margins, among many other things. Cash naturally ebbs and flows with your cash flow cycle, but if it’s constantly a problem and you’re always worried about cash, your business might already be under serious financial strain.
8. Overleveraging and high-interest payments
If your business is overleveraged, you could be paying a significant amount of your income in interest, and this could put your business at risk of financial trouble. High interest could also suggest your lender views your business as a risk, and so charges you more for financing. Check your books and get expert advice on how to work out whether you’re overleveraged or not.
9. Losing valuable staff members
Losing management personnel and other valuable staff members can be a sign that your business is headed for financial trouble. Senior staff are usually aware when their employer is on a downward spiral and may choose to leave sooner rather than later. Similarly, high turnover generally can mean the same thing, and it can compound the issue because you’re continually having to replace staff and losing valuable skill sets.
10. Selling capital items and assets
If you’re selling capital equipment and other assets to stay afloat from month to month, this could be a compelling sign your business is already in financial stress. Check whether your business could have survived without selling these items. If not, your business is likely already experiencing financial trouble.
Understanding if your business is in a financial spiral
From the inability to pay your bills to cash flow challenges, the major signs of a business in financial strife can be obvious. However, some of them – like high turnover and loss of major clients – can be warning signs of potential problems. All of these indicators could serve as valuable gauges of your organisation’s financial status, so keep them in mind to help you assess your business performance, even as you maintain detailed financial records and get expert advice as required.
Are you concerned about your business or seeking clarification for a business in financial stress? TPH Advisory can help. We’re experts in helping SMEs with innovative turnaround solutions, restructuring plans, and insolvency processes. Contact us today to find out how we can help your business.