With many businesses going under every year, it’s important to recognise signs that your business is under financial stress. The journey from success to failure doesn’t happen in a moment. It happens over time and isn’t without warning signs that, sadly, many businesses don’t see until it’s too late. One red flag doesn’t necessarily mean financial distress. But two more may well do
As a business owner or manager, if you can recognise the warning signs of financial stress earlier and make changes to detain them, you give your business a better chance of survival. Don’t ignore these red flags, but rather take proactive steps to correct these issues as they arise. Altogether, they are often too daunting. However, when tackled separately as they are recognised, many, if not all, may be overcome.
Cash Flow Issues (The First Sign of Financial Stress)
Cash flow is vital to every business as it creates the wiggle room to grow, invest, avoid extra debt and deal with unexpected costs.
Every business strives for consistent positive cash flow – more money coming in than going out. Yet, it’s not unusual, especially for a small or start-up business, to experience negative cash flow where they spend more than they make for a specific period. This may be necessary to get your business up and running or to take that next leap forward in expanding your business. In the short term, this isn’t always a sign your business is in trouble. However, when knowingly causing negative cash flow and not having, and sticking to, a financial plan and timeframe to get back into positive cash flow, a business can easily be put under financial distress.
Don’t rush into upgrades or expansion if you can’t be certain your business can handle it. A good bookkeeper and accountant are invaluable in helping you plan out a course forward to give you a stronger financial chance of achieving your goal without adding financial stress to your business.
Late customer payments are another source of cash flow that can be an issue, especially to small or medium businesses where cash flow varies on any given day. If you find your business relying on payments from a specific customer, then this is a warning sign to consider.
Pressure From Creditors
If you are often behind in payment terms with your creditors, this is a warning sign as well. Many businesses get accustomed to being late or even briefly on ‘stop’ with some creditors, which isn’t a good policy. Sometimes, there are acceptable reasons, such as a creditor who refuses to give a reasonable amount of credit time. An example might be a supermarket only given 7 days to pay for soft drinks. A supermarket has a huge number of creditors and bills to deal with, and 7 days can be difficult to manage.
If your business is constantly being hounded by creditors wanting their money, then clearly that’s another warning sign, possibly the most obvious of all signs your business is in financial stress.
In a perfect scenario, you would always pay right on time or even early if the creditor offers a benefit for doing so.
Reputation Damage
There is a run-on effect to being behind in payments, too. Being behind can cause distrust and even animosity with your creditors. This, in turn, can lead to an unwillingness from your creditors to grant future leeway or excuses, or better trading terms. It may cause them to take legal action or engage debt collectors, which can damage your credit rating and your chance for future loans. Customers who are affected due to delays in service or products can also become disgruntled and begin telling others. Staff who must deal with all these people also become disgruntled or even suspicious their job is no longer secure. That leads to low staff morale, commitment and productivity, further negatively impacting your cash flow.
Professional Help
Being behind on creditor payments has little to no advantage for anybody, so delaying payments for any reason is to be avoided if possible. The cost of engaging a professional bookkeeping company is offset by many factors, including avoiding such problems. Having accurate financial reports and following the payment planning a good bookkeeper sets for you will often avoid late payments. Just having a bookkeeper who keeps creditors informed and doesn’t ‘ghost’ them (whether intentionally or not) can make a massive difference to the leniency a creditor gives.
Heavily Relying on Single Contracts, Projects or Sales
If losing a contract, project or even a single large sale is going to break or put your business under pressure, that’s a warning sign of financial stress.
Having multiple sources of revenue, leading to consistent payments and income from a variety of customers and clients, is at least one good sign a business is healthy. The old saying of too many eggs in one basket applies here. A business is usually much stronger with more fingers in more pies.
You never want to lose a valuable contract, project or large sale; however, it’s going to happen from time to time. Hopefully due to reasons beyond your control. If the loss of just one of these has the potential to put your business on the back foot, affect your reputation or even break you, that’s a warning sign not to be ignored.
Excessive or Over-Discounting
Finding yourself heavily discounting products and services too regularly is another warning sign. In some franchises, for example, this is standard practice. Your franchisee contract often stipulates you must do so when the franchisor demands. However, if you are resorting to large discounts beyond the norm or regularly having ‘sales’ of goods at reduced prices to scrape up enough income to make payments or payroll etc, then something isn’t right. It’s a strong warning sign and we’d hope it’s a very short-lived occurrence.
Discounting can be a powerful strategy when a product is purchased at excellent wholesale pricing to pass on to customers. You still make a reasonable margin while hopefully gaining new customers who may have never known you existed prior.
Discounting products and services not specially purchased for discount can be a slippery slope. With every sale you lose revenue you could have made if your business was strong enough to wait for the sale. If the product is obvious to the customer that it was not specially purchased for a discount, you give them the impression you were trying to rip buyers off at the normal pricing. Therefore, you not only don’t make the margin you need, but you may do damage to your reputation in the process.
Staff Morale Too Low
Staff morale is important to any business. Despondent, unmotivated and unhappy staff creates a variety of issues. These include more staff management, less productivity, job insecurity, rumours and lack of effort. Also seen are increases in absenteeism, higher staff turnover and even damage to your business’s reputation. For these reasons, this warning sign is a serious symptom and should be acted upon without delay. Too often a business owner or manager will focus blame on the employee(s) and ignore the reasons behind the symptom.
Every employee handles pressure differently, and one disgruntled employee can quickly turn others disgruntled. Understanding, sympathising and reassuring your employees can go a long way to keeping them calm and avoid misinformation making things worse. You may not feel the need to tell them everything. However, not lying to them and telling them enough is a robust strategy.
Customer Awareness
Regular customers are more aware of many things than you might think. Overall, at least, they aren’t stupid. Many of them might be business owners themselves. They may be well-tuned into signs of business health such as stock levels, staff morale, and supply turn-around timeframes. Many customers will be quite friendly with staff after extended periods as a customer of your business. Consequently, employees may over-share with customers, thus validating any concerns they have regarding the business’s financial health. No matter how long a customer has been with you, price, value and service are deal breakers for them. Without these in their favour, they will at least explore other businesses and often stop coming to you.
Scrambling For More Customers
Are you putting effort and time into finding new customers? Are you relying on them to materialise rather than putting in effort to keep your existing customers happy and returning? That is yet another warning sign. Look to attract new customers but encouraging your existing customers to stay and spend more is usually the best strategy. Over a year, repeat customers will outspend a new customer often many times over.
Frequent Refinancing
Refinancing can be a solid strategy. A smart business operator will, however, follow the advice of their bookkeeper and accountant. In itself, refinancing isn’t a warning sign of financial distress. Refinancing often and regularly is, though.
Refinancing can be an option to lower interest rates on an existing loan and help to free up some cash flow. Frequent refinancing, however, is a red flag to lenders, and your credit rating can suffer. The need to refinance could be a strong indication that other areas of your business aren’t performing well. Can they be strengthened instead?
To Summarise
Don’t panic if you spot one of these warning signs. It may just be a minor blip on your business radar, and financial stress may not be substantiated by other signs. But don’t ignore any of them; wait until you have multiple issues to correct them. Prevention is always a better cure; maintenance is better than repair or replacement.