5 Red-Flags How To Identify If Your Business Is Struggling?

Virtual Accountant

How would you recognise warning signs that your business may be in trouble?

This article identifies five common warning signs to look out for. I’ll share some practical tips with you to help you proactively manage your business during tough times.

#1.  Paying Bills Late

How often do you juggle or miss payments to vendors and lenders?

If you’re constantly juggling your money, it’s time to focus on steps to improve your cash flow and get back on course. Consider ways to improve cash flow by:

  • Preparing regular payments and receipts schedules (known as cash flow forecasts). These will help you estimate what you need to pay and when, and when you estimate you’ll receive funds from sales, etc. Consider a rolling-twelve weeks’ forecast.
  • Implementing processes to chase overdue accounts from customers. Most accounting software has the ability to send regular statements.
  • Selling obsolete stock that’s been sitting idle for too long.
  • Asking your bank for a short-term loan or overdraft.

#2.  Unable to Access Funding

Do you have any contingencies for short-term needs?

If you can’t access cash quickly and when you need it, you’re in trouble. Plan some short-term funding strategies by:

  • Obtaining lines-of-credit or an overdraft with your bank when your business is showing positive cash flows and is making profit.
  • Proactively identifying cash shortages, by monitoring your cash flow forecasts, so you can take action before you run out of cash.
  • Negotiating longer payment terms with your suppliers.

#3.  Deteriorating Profit Margins

Is your profit uncontrollable and spiralling downwards?

It’s important to promptly identify unwanted trends and monitor your profitability. Examine:

  • Your gross and net profit margins. Regularly review your main expenses and identify areas that you can cut back on.
  • Whether you have the right processes to attract new customers and retain existing ones and whether they work.
  • Staff productivity and identify whether they are working at optimal capacity – review over-time levels to ascertain if it’s really necessary.
  • Whether your profit is being affected by overly generous discounts – look for alternative ways to maintain sales, such as volume-based sales or exceptional after-sales service.

#4.  Poor Accounting Records

How often do you produce and review financial statements?

Your profit and loss, balance sheet and cash flow statements are your business’ backbone. It’s essential to keep up-to-date accounting records – it’s not only a legal requirement but important to keep your business on-track. If you’re not doing so already:

  • Enter your sales invoices and bills into your accounting system regularly – at least weekly and reconcile your bank statements.
  • Examine your profit and loss statement to identify unwanted trends and deteriorating financial performance.
  • Prepare cash flow projections, at least monthly, to monitor your cash needs.

#5.  High Staff Turnover

Are you constantly replacing employees?

If your employee turnover is high, you’re wasting time and hard-earned cash hiring and training new staff. Try to reduce employee turnover by:

  • Ensuring your company culture offers the right balance of remuneration and rewards your employees want. It may be possible that staff prefer having time off instead of being paid overtime.
  • Reviewing your recruitment processes to ensure you know exactly what type of person you want to hire.
  • Investing quality time to train employees and offer ongoing coaching and support. Consider documenting key processes so they work consistently to your standards.

Stay In Control
Maintaining good financial discipline by managing your business’ financials can be easier than you imagined. Combine the suggestions above with the following tips to stay on-track for financial success:

  • Ensure your filing and record keeping systems are adequate. You should be able to easily locate important records such as bank and credit card statements, and invoices.
  • Allocate time every week to update and review your financial records and accounts.
  • Increase your grasp of accounting basics by attending webinars and workshops in your area.
  • Contact your bookkeeper or chartered accountant and ask their advice on which areas you should focus on. If you don’t have one already, consider engaging a virtual bookkeeper or virtual accountant.
  1. Andy Simpson 5 years ago

    I’m surprised you didn’t include failing to pay yourself first as a warning sign. I regularly sacrifice my salary to make sure I pay my staff in full and on time. Sometimes I question myself if this is right. Do you have any advice?

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