Don’t ignore the early warning signs of a business in distress
Understanding and the early identification of warning signs that a business may be (or about to be) experiencing distress can really be life or death.
Don’t ignore the early warning signs of a business in distress!
Understanding and the early identification of warning signs that a business may be (or about to be) experiencing distress can really be life or death. Business owners can avoid the dreaded insolvency by taking action before it’s too late.
So what are exactly are the early warning signs of a company in distress?
Without going into too much detail, in our experience history tells us that the top five signs a business is experiencing distress are:
- Declining Cash flow
May seem obvious here but usually the first sign things are going wrong is a consistently declining cash position. Put simply the business is burning through more cash than it is generating, resulting in a declining bank balance.
- Inability to pay bills on time
Frequently defaulting or missing bill payment dates is another early sign of distress. Simply not having the funds available to pay bills as they fall due.
- Rising creditor days and creditor balances
The need for delaying payments to creditors and increasing creditor balances points to a declining solvency position.
- Declining margins
Declining profit margins indicate costs are too high in comparison to revenue. This could be caused by a number of business drivers including price, volume, product margins and overhead expenses. The numbers should be investigated to see what the actual cause is.
- Declining mental health as a result of business stress
Business owners experiencing financial stress are very rarely happy and often start to experience declining mental health
So what does the regulator say about business insolvency?
In December 2019, ASIC released its Insolvency statistics report. Contained within the report ASIC tabled the top three causes of failure for the 8089 business that went into liquidation, they were:
- Inadequate cashflow or high cash use
- Poor strategic management of business
- Trading losses.
I must admit, no major surprises with the top 3.
So what can be learned from this?
- Business budgeting and forecasting is a critical ingredient to business survival
- Strategic business planning is a must – especially in difficult or challenging times
- Seeking help early and regularly
So what next – How to navigate challenging times?
COVID-19 has introduced new challenges to the business environment, causing more and more business to experience distress. As business leaders we have been presented with a unique set of immediate challenges:
- To develop short-term stabilisation and recovery planning scenarios; and
- To develop and update long-term strategic plans amid the crises
The global pandemic has completely reshaped the way we work, as restrictions start to ease, there is a real need to consider the ‘new normal’ within your business plans. For example have you considered decline revenue levels, supply chain interruptions, or the need to offer more flexible working arrangements?
The good news – it’s not too late. You just need to draw a line in the sand and start.
Those businesses that will be best placed to survive and thrive will be the ones that take the time to plan and consider market changes. Many of you may be wondering: where do we start; how do we plan in uncertain times; how can we maintain sales, profit and most importantly cashflow?
The good news we are here and committed to helping you get through this. Our services we provide include:
- A business health assessments
- The development of a 1 year strategic business plan – specifically focusing on the navigation through the pandemic
- Business budgets and cash flow forecasts
- Business scenario planning
- Accountability check-in’s and financial management
- Virtual CFO engagements
Our overall is to provide a clear perspective on what is required to improve your business and reduce business stress.