It has been reported that business closure rates are as high as 60 per cent for small businesses within the first three years of operation. Operating a business comes with uncertainties, and sometimes it can be difficult to pinpoint the exact signs telling you your business is in trouble. Whether you’re an owner, director, or manager, you should take steps to ensure that you’re not accumulating more debt and guiding your business to more trouble. While professional advice lets you know for sure whether your business is in trouble, these are some of the warning signs to watch out for.
Issues servicing debt
One sign your business is in trouble is when you have trouble servicing your debt. How much are you paying to service your debt? If you’re currently making a loss, how long can you sustain these losses and still manage to service your debt?
Ideally you should have sufficient cash left over to service your debt and pay it down. In companies on the brink of failure, there’s a clear trend toward accumulating debt and the associated problems with paying interest.
Closely linked to issues with debt servicing is the maxing out of your borrowing base. If you’ve borrowed too much money, your business will start feeling the crunch when interest rates start to rise. Check your business’s debt ratios against recommended levels for businesses of the same size and industry. A basic rule of thumb is that total liabilities divided by total assets should be less than 0.5, or that no more than half of the company’s assets should be financed by debt.
Reactive management strategy
Another sign of trouble is if managers and directors are addressing problems more than proactivelypursuing growth and expansionary strategies. If you find yourself constantly addressing problems in your business such as product or service issues, low or slowing demand, or decline in market share, it could be a sign that your business is swimming against the tide and headed for problems.
A steady history of increasing or constant losses is another clear sign that your business is in trouble. It could be a specific service or product line, or it could be simply that your niche or industry is contracting. Check your cash holdings by quarter and by year. Review your losses by category or product line and identify potential ways to rectify the problem.
Declining profit margins
Steadily lowering profit margins could be another strong sign that your business is heading for failure. Sometimes declining profit margins are due to industry-wide issues relating to demand. A reduction in the competitiveness of your business could be another reason. If so, a change in strategy could be in order, whether it’s selling higher margin products or seeking out cheaper production inputs.
Losing market share
A decline in your market share due to competitors gaining on your business is another potential sign of business failure. If you’re losing market share rapidly, you can find it increasingly difficult to maintain a healthy cash flow, pay your employees, cover your overheads, and still make a profit. Losing market share is a serious issue and it can happen to any business in any industry, whether large or small.
Competitors in decline
Interestingly, competitors exiting in the industry can be a sign of problems on the horizon for your business. While sometimes it’s due to poor practices or strategic planning, sometimes it’s simply because demand is in decline and the industry is contracting in response. If so, you need to identify your options and possibly plan an exit strategy if you decide it’s no longer profitable for you to stay in the market.
Cash flow issues
Even though cash flow problems can happen to profitable businesses, more often than not businesses in trouble have trouble paying their bills. If you’re constantly having to take out short-term debt just to cover operational costs, it could be a sign that you need to review your business.
There are many ways to check your cash flow health, but a basic way to review your cash flow status is to check your cash ratio, which can be calculated by dividing your cash on hand by total liabilities for the next two months. If the ratio falls below 0.2, you have five times more immediate debt to cash, which could mean your business has a cash flow issue.
Slow inventory turnover
Your inventory turnover rates offers a quick snapshot of how quickly your business is selling items. If your business’s inventory turnover rate is slowing, you’re not moving products as quickly. If the issue is seasonal or market-wide, then it’s less likely to be an indicator of a problem. However, if competitors are thriving and the economic outlook is positive, you might have cause to be concerned about your slow inventory turnover.
If you think your business is in trouble, get advice as soon as possible. Be aware of your duties as the director of a company. It’s always better to act quickly to avert or minimise a crisis than to start when it’s too late.