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

  1. Accounts payable aging
  2. Accounts payable increasing without corresponding increase in expenses
  3. Accounts receivable aging
  4. Accounts receivable or inventory levels increasing without corresponding increase in revenues
  5. Aggressive competitors
  6. Aging management team
  7. Banking lines of credit are maximised
  8. Borrowing funds to pay current expenses
  9. Competitive environment
  10. Departure of key employees
  11. Declining or slow sales
  12. Difficulties in finding necessary funding/loans
  13. Financing capital expenditures with working capital
  14. High employee turnover
  15. High pressure from suppliers for payment
  16. Highly regulated environment
  17. Inability to obtain new financing
  18. Industrial dislodgement in the sector
  19. Inefficient process of collection
  20. Managements reports:
  • Erroneous or non-existent
  • Incomplete
  • Untimely
  • No monthly check of accounts:

- Actual with budget

- Banks

- Ratios, own with sector

  1. Inventory levels that are too high compared with sales
  2. Lack of liquidity – there is not enough cash to pay the bills as they become due
  3. Lack of management budgeting, business planning, forecasting
  4. Lack of marketing and sales plan
  5. Late payments of government remittances
  6. Lifestyle of management/owners that exceeds the ability of the business to fund it
  7. Loss of key clients
  8. Low profits
  9. Low working capital (generally current assets should exceed current liabilities in healthy businesses)
  10. Management ego, greed or procrastination preventing good business decisions
  11. Management requests to lenders to skip some payments
  12. Nepotism
  13. New government regulations
  14. Old and stale product lines
  15. Operating expenses increasing
  16. Personal problems of senior or middle management:
  • Alcoholism
  • Depression
  • Divorcing
  • Drugs
  • Gambling
  1. Poor financial indicators:
  • Cash flows
  • Debt to equity ratios
  • Gross margins
  • Working capital ratios
  1. Poor financial practices
  2. Poor labour relations
  3. Price erosion
  4. Refinancing of assets and sales of assets to maintain cash flow
  5. Saturated or shrinking markets
  6. Shareholder disputes
  7. Significant overhead costs
  8. Suppliers demanding cash on delivery (COD)
  9. Unaware or no use of technological instruments
  10. Unfair competition
  11. Unreasonable terms from suppliers

Late warning signs

  1. Creditor legal action
  2. Demands by lenders for immediate repayment of debt
  3. Failure of timely reporting and remittances to the government for PAYE, VAT and income tax instalments
  4. Inability to replace staff, especially key and skilled staff
  5. Lenders demanding additional security or new guarantees to maintain existing financing
  6. Negative cash flow
  7. Numerous suppliers demanding cash on delivery
  8. Operating losses for several years in a row
  9. 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.