A business should have contingency and immediately take action to avoid insolvency — before it’s too late. Here are the warning signs your business is in financial distress and has to implement recovery measures.
Remember: Cash is King. When cash is tight, businesses experience sporadic dips. A constant lack of cash is the first sign that something’s not right.
It’ll lead to problems if a business is continually spending more than it earns — unless it is measured and well funded.
The bank or lender could be suspicious of your viability, which is why there’s a higher interest rate when you apply for a loan — this can be a sign of your poor financial health. Funding will cost more if lenders consider you a high risk.
Another bad sign is if lenders seek stronger security or guarantees against what they will lend you.
It suggests a business can’t pay its way if it frequently defaults on bills. Adding to the dilemma is if the business is under funded, couldn’t chase after debts, or heading to liquidation.
It can also be bad and damaging for the business’s reputation if it default on HMRC or other formal arrangements.
Creditor days or debtor days are either signs of possible trouble in a rise. Some suppliers can cut off the supply of vital ingredients or components if your business couldn’t help but to delay payments to creditors.
What may also cause future cash flow problems is if you’re unable to chase payment effectively.
To see whether these are signs of something serious, sudden changes in these numbers should be investigated.
“Turnover is Vanity, Profit is Sanity, but Cashflow is King” — Unknown
Most experienced entrepreneur will tell you that what matters is profits for long-term survival. Falling margins is not a sustainable position. It suggests that costs are too high and prices or income is too low.
Businesses in distress are not happy. The owners and managers can sense something is wrong and get stressed, which gets passed on. Senior people may also leave in a short notice.
To make savings, things start to get cut at random and deploy strategies are suddenly switched to try and revive what’s not working.
If you need help with finance and financial resources, MyFi has you covered with the right financial service — customised for you!
Note: MyFi and other sources of finance are options that should only be used for once off funding requirements.