The decline of a business usually occurs in stages, and more often than not there are warning signs. Listed below are the signs that should show you the amber light – or even the red light. The more signs visible, the more dangerous the situation.
Early warning signs
- Accounts payable aging
- Accounts payable increasing without corresponding increase in expenses
- Accounts receivable aging
- Accounts receivable or inventory levels increasing without corresponding increase in revenues
- Aggressive competitors
- Aging management team
- Banking lines of credit are maximised
- Borrowing funds to pay current expenses
- Competitive environment
- Departure of key employees
- Declining or slow sales
- Difficulties in finding necessary funding/loans
- Financing capital expenditures with working capital
- High employee turnover
- High pressure from suppliers for payment
- Highly regulated environment
- Inability to obtain new financing
- Industrial dislodgement in the sector
- Inefficient process of collection
- Managements reports:
- Erroneous or non-existent
- Incomplete
- Untimely
- No monthly check of accounts:
- Actual with budget
- Banks
- Ratios, own with sector
- Inventory levels that are too high compared with sales
- Lack of liquidity – there is not enough cash to pay the bills as they become due
- Lack of management budgeting, business planning, forecasting
- Lack of marketing and sales plan
- Late payments of government remittances
- Lifestyle of management/owners that exceeds the ability of the business to fund it
- Loss of key clients
- Low profits
- Low working capital (generally current assets should exceed current liabilities in healthy businesses)
- Management ego, greed or procrastination preventing good business decisions
- Management requests to lenders to skip some payments
- Nepotism
- New government regulations
- Old and stale product lines
- Operating expenses increasing
- Personal problems of senior or middle management:
- Alcoholism
- Depression
- Divorcing
- Drugs
- Gambling
- Poor financial indicators:
- Cash flows
- Debt to equity ratios
- Gross margins
- Working capital ratios
- Poor financial practices
- Poor labour relations
- Price erosion
- Refinancing of assets and sales of assets to maintain cash flow
- Saturated or shrinking markets
- Shareholder disputes
- Significant overhead costs
- Suppliers demanding cash on delivery (COD)
- Unaware or no use of technological instruments
- Unfair competition
- Unreasonable terms from suppliers
Late warning signs
- Creditor legal action
- Demands by lenders for immediate repayment of debt
- Failure of timely reporting and remittances to the government for PAYE, VAT and income tax instalments
- Inability to replace staff, especially key and skilled staff
- Lenders demanding additional security or new guarantees to maintain existing financing
- Negative cash flow
- Numerous suppliers demanding cash on delivery
- Operating losses for several years in a row
- Third party demands by government
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.