22 Warning Signs of a Business in Trouble… and what to do about it.

22 Warning Signs of a Business in Trouble… and what to do about it!

 

We’re hearing daily of the struggles of business owners and record levels of businesses going into administration/liquidation.  In our more than 30 years of dealing with various financial slumps e.g. “Global Financial Crisis (2007-2009)”, “COVID 19 Pandemic (2020)” etc, we’ve witnessed the pain and suffering this brings to business owners.  What we’ve also seen is that there is often a way through these situations.  Here are some signs to look out for and some tips on ways to survive this current situation and be ready for the inevitable recovery.

 

1. Overdraft near or at its limit for a significant period of time.

This is referred to by banks as ‘hard core’ debt.  They look closely at how their customers are using overdraft facilities and ‘warning bells’ go off for them if an overdraft stays at its limit for too long.  It alerts them to start asking questions about the health and viability of the business.

2. Difficulty meeting supplier payment commitments.

This can happen from time to time, however when it starts to look like there isn’t any light at the end of the tunnel this is a bad sign.  You need to get help here, as you  could be trading insolvent.  Insolvency is when an individual or organization can no longer meet its financial obligations with its lender or lenders as debts become due. Insolvency can lead to insolvency proceedings, in which legal action will be taken against the insolvent entity, and assets may be liquidated to pay off outstanding debts.  If you suspect your business is insolvent you should seek professional advice and cease incurring more debt.  There are serious consequences for directors of insolvent companies.  

3. Staff spending time on telephone with suppliers re: outstanding payments.  

This has the double whammy effect of wasting staff time, as well as creating a negative atmosphere amongst staff.  They start to get the feeling there isn’t much of a future and may lose motivation, which adds to the decline.  Staff turnover is very expensive i.e. having to employ and train new people.

4. Suppliers threatening Cash on Delivery (COD) terms or stop supply.  

This obviously has a negative impact on both cash flow and the ability of the business to keep going, if supply is stopped.  It’s vital to make arrangements with suppliers to pay and ensure continued supplies.

5. Suppliers putting business last for service priority.  

You become a ‘C’ class customer and this makes it difficult to meet obligations to your own customers.  It pays to be honest and find ways to work with suppliers to get some arrangement for payment in place.  You might be surprised at how helpful some suppliers will be.  If they can help you to ‘trade through’ difficulties they get to keep a customer too.

6. Dishonoured payments.

As well as being embarrassing, this can be very costly in charges and wasted time dealing with replacement payments, explanations to suppliers etc.  It also alerts your bank to difficulties and will put them ‘on notice’.

7. Suppliers issuing demands or threatening legal action.

This has a negative influence on staff motivation and it creates lots of work to negotiate with suppliers and collection agencies.  Communicating with suppliers is the best way to avoid this and make arrangements with them.

8. Accounts Payable balance increasing whilst Receivables and Inventory/Work in Progress remain static.  

This probably means sales and collections are declining and there will be a point at which the cash flow can’t cope.  Keep a close eye on this and be ready to quickly make changes to costs and overheads.  You need to ensure the overheads can be covered by gross profit i.e. sales less direct costs.  This is also referred to as your ‘break-even’ point.  Here’s a link to our Break-even calculator to work out yours.

9. Difficulty paying GST and payroll tax deductions to Tax Office.

The Tax Office will allow you to arrange to pay off one amount, but will then expect that subsequent amounts are paid up to date.  If you don’t comply with the arrangement they will commence action to recover the funds.  Best way to avoid this situation is do a detailed cash flow forecast to ensure you are able to cover tax payments.

10. Hesitation to lodge GST returns due to funds required elsewhere in business.

It’s very dangerous to use the funds you’re holding on behalf of the Tax Office as working capital for your business, if you aren’t absolutely sure you can come up with the tax payment when it’s due.  The Tax Office is one of the biggest organisations responsible for sending out ‘winding-up’ notices and are experts at recovering money.

11. Correspondence received from Tax Office re outstanding lodgments or overdue payments.

Unless it’s a statement of an arranged payment of a debt that is being adhered to, this indicates the business can’t meet its obligations and may be trading insolvent.  See 2 above regarding insolvency.

12. Need to sell capital assets to fund ongoing trading.

Unless they are obsolete and it’s a regular occurrence in your business, having to rely on sale of assets to trade means the business may not be viable.  You need to rethink your overheads and business structure.  If increased sales aren’t a definite, you need to find ways to manage with the current sales levels to avoid losses i.e. reduce your costs and overheads.

13. Unable to place orders for stock due to cash constraints.

This obviously means you won’t have stock to sell, sales will suffer and customers will go elsewhere.

14. Staff morale is down due to perception of cash flow difficulties.

Your staff are the ‘front line’ of your business and generally are the ones dealing with customers.  Low staff morale impacts customer service and hence sales.  It’s best to work with your staff and be honest with them about the situation.  They can be your best asset in times of difficulty.  If it’s a good place to work they will want to work with you to keep the business viable and keep their jobs for the future.

15. Higher than normal staff turnover as a result of above.

If your business is in a place where jobs are plentiful, this will be an obvious consequence of low staff morale.  If not, staff may be more prepared to stick around and work through the bad times.  See 14 above.

16. Banks require more information or security in order to maintain facility.

Banks closely analyse the nature of overdraft usage and account activity to determine your ability to service loans/overdrafts.  They use ‘Lending Covenants’.  Covenants are most often represented in terms of financial ratios which must be maintained for businesses which lend, such as a maximum debt-to-asset ratio or other such ratios. Covenants can cover everything from minimum dividend payments to levels that must be maintained in working capital, to key employees remaining with the firm. Once a covenant is broken, the lender will typically have the right to call back the loan from the borrower.  Report on your lending covenants to ensure you aren’t breaching them.

17. Putting off costs of maintenance on equipment.

The danger with this is that the equipment fails when you least need it e.g. the coffee machine breaks down at a coffee shop.  Not only does this eliminate coffee sales for the period of the breakdown, but also sales of additional items.

18. Bank suggested refinancing

Probably due to breach of covenants mentioned in 16.  A very time consuming and costly exercise to be avoided if possible.

19. Behind with superannuation obligations for employees.

This may seem like an easy one to put off paying, but as a director you will be held personally liable for staff super entitlements, should the business be liquidated.

20. Behind with insurances e.g. workers compensation, product and public liability.

These expenses often seem like easy ones to delay, however insurance companies are often instigators of ‘wind-up’ notices.  

21. Accountants expressed concern over financial accounts prepared.

When you sit down with your accountant to discuss your financial results it’s vital you fully understand the story the reports are telling you.  If you can’t understand immediately what your accountant is saying, dig a little deeper and seek education about what it means.  If your accountant isn’t good at explaining things in plain english, seek a second opinion.  There are people around who can explain things in plain english.  A court won’t accept ignorance as an excuse for insolvent trading.

22. Postponed meetings with accountants or provision of financial information due to discomfort with what might be proven once accounts are completed.

As can be seen from the ‘Takeaway Points’ below from a business liquidation – the court takes a dim view of ‘blame shifting’ by a director of an insolvent business.  

 

Takeaway Points from a business liquidation: The duties of directors when faced with insolvency are strict. A director is expected to be aware of the financial state of the company and to prevent further debts being incurred if they suspect the company is insolvent or face personal liability. A director cannot rely on another person where there is information available to the director which indicates potential insolvency, regardless of the knowledge or expertise of the person relied upon. Directors should be constantly mindful in this regard. 

 

Some of these issues will be experienced by healthy businesses from time to time, due to growing pains.  However if one or more symptoms is being experienced regularly it is critical the business owner seeks out guidance.

 

I have occasionally seen businesses that were experiencing these issues, and the business owner was feeling pretty low about the situation.  With good help and advice most of them were able to ‘work through’ the issues and come out the other end a much stronger and sustainable business.

 

Most commentators are reporting tough times, so my advice to all business owners is to take a serious look at your operations and prepare the business to be a ‘lean-mean fighting machine’.  This should help you to weather the storm and come out the other end much stronger and wiser.

 

Here are a few things you can do to tighten up operations: 

Customers

Watch out for creditworthiness of customers.  If you are a service based business, try to get up front deposits and progress payments.  If you are a product based business check the previous payment history of customers who make big purchases.  Do ‘credit checks’.  e.g. www.Creditorwatch.com.au

Stock

Closely monitor stock requirements.  Check sales figures to see trends and allow for some decline in sales compared to previous periods.  Don’t get sucked into buying stock because of discounts, unless you are absolutely certain you can turn stock over quickly – it’s cash piled up on the shelves!  Work closely with good customers to predict their short and long term requirements.

Jobs

Only take on jobs that are going to be profitable and not dig you deeper into debt.  Ensure you get deposits on big jobs and progress payments wherever possible.  Closely manage jobs to avoid hold-ups, rework and any reason for customers not to pay on time.

Accounts Receivables

Put someone in charge of Accounts Receivables and give them a system to work with.  Give them targets to meet.  Get regular reports and meet with the person who is doing the collections.  Ensure your customers know what your terms of business are and that they are clearly stated on your invoices and statements.  Provide as many ways as possible for customers to pay you.  Regularly send statements to customers of what they owe and how long it’s been owed.  Make speedy follow up calls and make arrangements to pay off larger sums if they can’t be paid in whole immediately.  Don’t hesitate to call in the debt collector.  The quicker you get onto it the quicker you will get paid.

Accounts Payables

Get the maximum terms possible from suppliers and report on business done with them to get better terms.  Be prepared to shop around for alternatives.

Costs and Overheads

A small reduction in Costs can have as much impact on the bottom line as a big increase in sales, and may be easier to achieve.  Shop around and look for more effective ways to achieve the results.  Make suppliers work harder to retain your business, subtly and politely create a competitive environment amongst suppliers.

Don’t just ‘slash and burn’ when it comes to cost reduction.  Look closely at all overheads and ask yourself “How does this cost contribute to the profit?”.  Don’t cut the wrong overheads e.g. marketing and good staff.  See our E Book ‘How to Control Your Business Cash Flow’

 

Margins

You must try to maintain margins as much as possible – not just through more sales but also by good cost management.  Competitors may falter, which may give an opportunity to increase prices and allow you to maintain margins.  Supply, quality and reliability are just as important to customers as price.  You need to convince customers you will be around for the long term and how/why your product/service is better.

Human Resources

It could be a great opportunity to get the ‘right people on the bus’ and the ‘wrong people off the bus’.  You may even get some good people from other businesses who are doing ‘slash and burn’ savings.  Work with your team to help you get through the downturn and come out the other end stronger and wiser.  Give your team incentives to do the best job possible and make sure it’s in line with what drives profits – not just sales.

Marketing

Find out what’s working and what isn’t.  Investigate and trial new ways to get the maximum results. When competitors falter is a good time to promote yourself.  Don’t stop marketing.  Learn about modern marketing methods and get help if you need it.  It’s an investment not a cost.

Sales

Closely monitor and measure sales conversion results.  Improve sales processes – analyse them and discuss with the sales team.  Find ways to improve the sales process and use ways to help it along.

Operations

Use the opportunity to work with your team to find ways to be more efficient.  Look after customers to the max and increase customer satisfaction levels. 

Accessing Credit

Banks are now more stringent about lending.  You need to go to them with good information, such as 3 years historical reports, which are accurate and meaningful, as well as a 3 years forecast of profit and cashflow.  Banks will need a lot of convincing you can repay the funds and will look at how you manage your own money as well as theirs.  Get help to present your business in the best way possible to give lenders confidence you’ve got your ‘finger on the pulse’.

Cash Flow and Working Capital

Now more than ever you need to be able to ‘crystal ball gaze’. You need to be able to see where your cash will be in the future – 3, 6, 9, 12 months.  You need to understand where your money is and keep it for longer in your bank account. 

Where is the cash?

• • Sitting on the shelves in stock
  • With customers who haven’t paid yet
  • With suppliers paid too quickly
  • Jobs in progress that haven’t been invoiced yet.
  • Excessive costs and overheads
  • Assets or equipment that should have been leased or hired

 

In Summary (if your business is experiencing difficulty):

• • Seek immediate advice from a professional about your situation.
  • Ensure you fully understand the accurate financial position.
  • Show leadership and don’t blame others.
  • Set a strategy to ‘trade through’ if possible.  
  • Do a thorough and realistic review of your sales pipeline, costs and overheads.
  • Make tough changes if necessary to reduce costs and overheads (often including business owners’ personal overheads).
  • Don’t incur more debt
  • Set a realistic Budget and Cash Flow Forecast and stick to it rigidly.
  • If it’s not possible to trade through and your business is insolvent, face up to it quickly and deal with notices received properly.  Don’t bury your head in the sand.

 

If all of this sounds like too much to handle – get help.  Help may seem costly, but not getting help may be more costly.  The funds to pay for help can come from the efficiencies and savings created.

 

Feel FREE to download our E-Book ‘Protect Your Business from Volatility’ for strategies on how to survive tough times and emerge with a stronger and more sustainable business.