business financial trouble

7 Signs Your Business Is In Financial Trouble

By Lisa Hogg

In the last decade, a lot of companies from high-profile mainstays to small local businesses have fallen by the wayside. While some of these closures, administrations and liquidations come seemingly out of the blue, there are some where the warning signs for the company were there before the final nail was driven in.

Here are seven key signs that your business is in financial trouble.

1. Your Cash Flow Is Imbalanced

As the saying goes, in business, “cash is king.” A smooth cash flow, where enough is coming in to cover your outgoings, is key to keeping your business operating. However, this flow can be fragile, particularly in small businesses. A supplier or customer not paying on time can impact your cash flow, as can premature expansion or overspending in periods where the going is good.

Negative cash flow is acceptable in the short term while a fledgeling business finds its feet, or in the aftermath of a major expansion. But without positive cash flow, in the long run, a business cannot pay its expenses and therefore cannot survive. If your finance department is putting off paying its bills or staff, it could be a sign of imbalanced cash flow.

2. Creditor Pressure Is Growing

The best way to keep your creditors happy and minimize the pressure on your company’s shoulders is simply to pay them on time. If your outgoings outweigh your income, it’s tempting to put off paying invoices. But doing so is a sure-fire way to sour relationships with your creditors, who may start chasing you for payment.

This can start the slippery slope into further trouble, as they’re likely to continue chasing you until your debts are paid off. Creditors may even resort to legal action in an attempt to retrieve their money, and you could end up facing bailiff action.

3. You’re Always Refinancing

Refinancing in itself isn’t a sign of financial trouble; it is a legitimate method of freeing up cash tied up in company assets, by borrowing money secured against an assets’ value. It can also be used to lower rates. While refinancing once isn’t abnormal, the company must be able to afford the repayments. If it happens frequently, it could be a sign of deeper financial issues and lenders will become wary of companies constantly refinancing, which can lead to further financial troubles later.

4. Staffing Issues

Unless you’re a sole trader, staff are one of the most vital components of your business, and employee morale often correlates with your company’s health. One of the most obvious signs of financial trouble related to staffing is layoffs and cutbacks in employee benefits, bonuses or a freeze on pay.

The company may also change its contracts with staff, reduce hours, introduce zero-hour contracts or make staff work more for the same money. Doing so risks souring relationships with your employees, and could lead to the next point.

5. Bad Office Atmosphere

Reducing benefits while increasing expectations on employees will likely lead to a bad atmosphere and a decline in job satisfaction. The office may become less of a place of work and more of a place for fighting fires, constantly dealing with problems rather than being productive. Staff may latch onto this downturn and change of atmosphere and start leaving in higher numbers too, bringing us back to the previous point about staffing issues.

6. Relying on Individual Contracts or Projects to ‘Sort It Out’

When a business is operating healthily, it will have several customers or clients on the books with consistent income. Companies in a less healthy position may put more weight on the contracts they do have, and if one of them changes supplier or stops being a regular source of business, the effects will have a more detrimental impact.

You may notice the business is relying more on fewer clients or focusing all of its efforts on acquiring new ones to the detriment of those they already have. This could sour relationships with existing customers and be a sign the directors are desperate for income.

7. Your Customers Have Noticed

Customers are very good at spotting when things change, and if they feel they’re getting less while paying the same money, they’re unlikely to stay quiet. If your employees are unhappy, prices suddenly rise, or benefits such as loyalty programs are cut back, rumors may start circulating, customers may start asking whether you’re closing, and in the worst-case scenario, it could get picked up by local or national media.

Summary

No company, no matter how big or small, is immune to financial trouble. While these signs on their own don’t automatically indicate difficulty, if they start appearing in tandem with each other, it could be a sign that things are not well, and it’s time to start thinking about options that will allow you to continue trading and get things back to normal.

Featured photo credit: Depositphotos
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Lisa Hogg
Originally from an accountancy background. Lisa became a licensed insolvency practitioner in 1999 and joined Wilson Field in 2002. Lisa is a Director and board member and possesses a high level of technical expertise. She is involved with overseeing insolvency appointments on a day-to-day basis.

2 comments

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  1. Hong Jin

    I think these 7 points are very practical. Whether it is a big business or a small business, these seven points must be concerned by the leaders. Anything that goes wrong will make the company stagnant. Among them, cash flow is the most important. If the expenditure is always higher than income, once the capital chain breaks, it will bring a devastating blow to the enterprise.

  2. Very interesting article Lisa! I wish my old bosses read this because it seemed like there were always trouble with cash flow imbalances over there! Thanks!

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