The first sign things are going wrong is a constant lack of case. The old adage that cash is king exists for a reason. All businesses suffer periodic dips where cash is tight. But if cash flow is continually a problem, the business is in trouble. If a business is continually spending more than it earns, unless it is deliberate and well-funded (as with some tech businesses at launch) it will lead to problems.
High interest payments
This could indicate poor financial health and be a sign your bank or other lender is suspicious of your viability. If lenders view you as high risk, funding debt will cost more. It is also a bad sign if lenders always seek stronger personal guarantees or security against any money they lend.
Defaulting on bills
Everyone misses a payment or forgets a bill, but if the frequency with which it occurs increases, it suggests a business can’t pay its way. This is a sign it is underfunded, isn’t chasing debts hard enough or is heading to liquidation. Defaults on HMRC or on other formal arrangements can be particularly damaging. It can also be bad for your reputation and that of your business.
Extended debtor or creditor days
Another sign of possible trouble is a rise in either debtor or creditor days. If your business has to delay payments to creditors, this can force some suppliers to cut off the supply of vital components or ingredients. Likewise, if you are unable to effectively chase payment it may cause future cash flow problems. Either way, sudden changes in these numbers should be investigated to see whether they are signs of something more serious.
Ask any experienced entrepreneur and they will tell you that for long-term survival what matters are profits, not sales. As the old saying goes, turnover is vanity, profit is sanity. Falling margins suggest that costs are too high, and prices or income is too low. This is not a sustainable position.
It may sound simple, but businesses in distress are rarely happy. Owners and managers, who can sense something is wrong (but may not be sure what) get stressed and pass it on. They start cutting at random to make savings or deploy sudden switches in strategy to try and revive things. Lots of senior people may leave in a short time. These are all signs that the business might be heading down the decline curve and that action is needed urgently to pull things back.
Article Provided by Karen Stewart Even Keel Financial