Running a business involves staking shareholders’ money and the livelihood of employees. As such, an owner would want to prevent failure at all costs. Usually, money troubles in business and, consequently, bankruptcy could be averted if the following signs are detected early.
Poor Cash Flow
Cash, being the most liquid asset around, enables businesses to continue operating. Hence, a lack of assets poses a significant impact on their ability to pay off financial obligations, such as principal and interest payments for both short- and long-term debt that a business took on to take on bigger projects in the first place.
In the accounting realm, this could be summed up to a business’s cash flow coverage (CFC) ratio or how big its operating cash flows are in proportion to its total debt. A CFC ratio that is lower than 1 indicates poor financial health that usually results in a business’s bankruptcy if not addressed within two years. With the help of a reliable bankruptcy attorney, you can be advised of the best course of action other than bankruptcy.
Have your financial statements been racking up on A/R’s? Or, are you keeping inventory more than you’re selling it? These could help you determine poor cash flow first-hand before it gets to the books.
You can address this in various ways. Ramp up your sales by offering discounts to early payers or making online payment options available. To curb your unpaid receivables, sending invoices out promptly and indicating the terms, due dates, and overdue payment charges legibly will encourage on-time payments. For undispensed inventories, look into increasing their selling prices but keeping them within the industry ceiling. In some cases, though, dispensing them at a discount to save your cash flow could be the wiser option.
Losing a Big Client
Another tell-tale sign that a business is failing is losing a key account. Securing a deal with them promises you constant big cash flow. However, losing them could cause your finances to plummet.
What’s even more telling is if a business loses several big clients. This could happen as fast as when a company scandal breaks out to the public, such as employee protests, probes for corruption, and confidential data leaks. It is worth remembering that it takes a lot of trust and goodwill building to be chosen by a key customer, and it takes just as much effort to maintain such trust.
Fighting Fire After Fire
Has your business been occupied with resolving urgent but unimportant matters lately? If so, the business is bound to be counterproductive, and employees tend to be out of focus. Perhaps, it’s time for the team to revisit the four quadrants of time management.
Look for inefficiencies that may be lying within the processes in place. In some cases, these procedures are proven obsolete with how situations usually pan out, that is, there are more irate clients by the hour or longer turnaround times for transactions. In such circumstances, there is a serious need to map these usual scenarios and use these as a reference in revising standard operating procedures. If not done immediately, this would likewise run you the risk of losing clients, or worse, big ones.
If you’re seeing more and more capital expenditures that take a long time to break even, you’re only wasting precious production costs. Another bad indicator of wasteful expenses is when they need more maintenance than normal or are no longer as efficient as those top-of-the-line options offered in the market.
You don’t always need to replace this underused or almost obsolete equipment. However, moving forward, the purchase of any equipment should involve thorough financial planning. To justify the purchase, the timeline of payments should be juxtaposed to the business’s current financial state.
Likewise, factors such as downtimes, depreciation, and upgrades should be considered in forecasting its ROI. Ideally, it should break even by half of its economic life. If these are not done, the equipment will again fall into one of those unplanned expenditures that will imply more costs later on.
Poor Workforce Management
Like equipment, the deployment of employees must also be carefully planned. Otherwise, you’ll be paying for less-than-optimum work. From time to time, managers should revisit their team’s structure, see who is ready for promotion, and see what more roles a member can assume given his or her current designation. Designations should never be cast in stone. Instead, they have to be kept open for review and adjustment according to the needs of the times.
A business’s performance is measured in various ways, including how well customers and the public perceive them. However, equally important, their financial standing helps them measure if they are at least keeping afloat despite the inevitable debt. It is, therefore, crucial to stay abreast with financial health data and how well the company is faring relative to the rest of the industry to take immediate action.