Business in Financial Distress

Warning Signs: Is Your Business in Financial Distress?

Everyone hopes for the best when starting a new business. In the beginning, the hard work is often fueled by big dreams and future possibilities for the company. It is exciting and challenging at the same time, and owning a business can have incredible payouts in the future. But, as things are progressing, it is important that you watch for a few warning signs that might indicate potential problems for your company. When you see the signs of your business in financial distress, then a few changes can correct the course and help you avoid disaster.

Look for Clues about the Financial Health of Your Company

It is easy to get caught in the assumption that everything is going well. Then, you might feel blindsided when things start to fall apart… especially when you didn’t see it coming. The truth is that there are always clues that indicate the success of your company. If you notice these small issues, then it is time to adjust your strategy and habits so that you can avoid bigger problems in the future.

Sometimes, these clues show up in the financial reports. But, other times, the clues might be in sales patterns or other indications that could impact the bottom line. The most important thing that you can do is pay attention to the financial statements and the ongoing patterns of the success in your company. Then, you can seek assistance if you notice anything unusual. This proactive approach is essential so that you can avoid problems later on.

If you don’t have experience with accounting and bookkeeping, then it can be helpful to enlist the services of a team that understands small business strategy. Tapping into this expertise can help you identify things that will impact the future of your company.

Here are a few things that you should be watching for that indicate signs of a business in financial distress:

Sign #1: Cash Flow Problems

If money is coming in, but there is never enough to pay the bills, then it is an indication that you need to look at the cash flow for your company. The profit margins are found in the difference between receivables and expenses. You can bring in large sums of money. But, you aren’t profitable if your expenses are higher than the amount of money that is coming in.

How much money is in the bank account right now? What are the upcoming expenses that need to be paid? One common problem that happens with cash flow is that the company has money in the account right now, but the money is spent leaving nothing leftover for expenses in the future. For example, it’s no surprise that taxes will need to be paid regularly. But, if you use the excess money in the savings account to buy more inventory or equipment, then you might not have the cash available to cover the expenses for the tax bill.

Cash drains can lead to the downfall of your company. Not only do you need to make sure that you are bringing in money to cover the costs. But, you also need to be sure that you don’t have high spending and overhead expenses that affect your cash flow. These are some of the most common reasons your bank account is being drained:

  • Excessive overhead costs
  • Heavy debt loads and high-interest payments
  • Poor spending decisions
  • Outstanding accounts receivable

Keep in mind that it is normal for companies to have fluctuations in sales numbers. You might have a great month with a large amount of cash flow. Make sure that you have money set aside so that cash is available to cover the expenses in the lean months that will inevitably happen in the future.

Sign #2: Increasing Overhead Costs

When the business is thriving, it is easy to slip into a pattern of overspending. If money is in the bank, why not use it for business investments, marketing, or more inventory? It isn’t necessarily a bad thing to increase overhead costs. But, you need to make sure that the receivables increase accordingly.

Also, keep in mind your spending patterns throughout the seasonal changes in the industry. Your spending might go up in the busy season. But, you need to be prepared to drop those expenses in the future when things start to slow down again.

If you can see that your spending and overhead costs are increasing but your receivables are staying the same (or even decreasing), then it means that you are heading towards financial problems. Eventually, you will burn through the cash in the bank and face a difficult situation because there’s no money left over to pay the bills.

Take some time to understand why your expenses are increasing. Where are you spending the most money? Are there any spending categories that can be adjusted to reduce the amounts that you are spending? There might be small costs that add up quickly, such as interest expenses or other non-operating costs that pop up. Or, there could be monthly subscriptions that are no longer needed. Don’t let these cash suckers eat away at your profits. Be proactive to make sure that every dollar spent is going towards an essential product or service that is impacting your company in a positive way.

Sign #3: High Levels of Outstanding Receivables

It’s great to see that sales are increasing. But, if you are selling products and services and the outstanding receivables number is growing, then it could be a potential indication of an issue. When your business profits are tied up in invoices that are outstanding, then you don’t have the cash in pocket that is needed to keep the company running.

The key is to ensure that customers understand the credit policies. Communicate the payment terms upfront, and then make sure that your team is consistent about following through on the collections. Sometimes, it takes a little work to ensure that you are collecting the money that is owed by your clients. But, it is worth the effort to collect the outstanding invoices so that you have money to keep your company going.

Sign #4: Sales are Decreasing

Even after a strong season or year, there might be times when the sales start to slow. It might seem like an obvious financial warning sign, but there are times when business owners don’t notice the changes in sales numbers. If you don’t have money coming in through product sales, then it is time to figure out the problem.

You need to get to the root of the issue to find the area where you can have the most impact to increase sales. The stagnation could be seasonal changes, which means that you can anticipate that things will increase again in the future. But, these revenue decreases could be due to adjustments in your marketing campaign or a difference in the inventory that is available.

It is essential that you know what your customers need and want so that you can be sure that your products and services are designed to match their needs. Then, your strategies can be catered to increase the likelihood of repeat customers.

Sign #5: Customers aren’t Coming Back

The easiest way to help your company grow is by increasing the rate of repeat customers. It takes a lot of money to generate new customers through marketing efforts. The simpler (and cheaper) method is to continue selling products to people who already trust your company.

You need to maintain communication with current and previous customers, helping them know where to go when it is time to make another purchase. Keep your company at the top-of-mind so that people know that you are always there to support them when they need help in the industry.

Run reports to look at the patterns of sales. Then, use your marketing strategy to reach out to customers who might be interested in buying again. When you are consistent with customer communication, then it is easy to build business relationships that last for many years.

Business in Financial Distress? Talk to the Experts

If your business is having financial problems, then you might need to bring on a team of experts to help with the cash flow and strategy. Make sure to choose a team of bookkeepers and accountants who understand small business strategies, ensuring that you receive services that are catered to the needs of your company.

At Easier Accounting, we have specialized our services to match the accounting needs of startups and small businesses. We understand the challenges that you are facing as you work to grow the company. So, we offer the services that you need to manage your ongoing financial tracking and reporting. At the same time, you can tap into the tax strategy to help you leverage all of the financial benefits that are available from working with an experienced team. If you are interested in learning more, then it is time to talk to our expert team for a consultation. Call today to see if our accounting services are a good fit for your company: (888) 620-0770

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