Small Business Taxes & Management
Signs of a Business in Trouble
Small Business Taxes & ManagementTM--Copyright 2010, A/N Group, Inc.
It's not unusual for owners to be the last to realize their business is in trouble. Employees, suppliers, customers, and friends and family may notice a problem long before you do. While the best approach is to perform a thorough financial analysis--comparing this year to last, reviewing financial and operating ratios, comparing your performance to the industry, etc.--there are some telltale signs. Your business ok? You can use many of the indicators below to spot troubles at suppliers or customers.
- Year-to-year sales comparisons show a decline. (You may be able to spot the decline just by your bank deposits.)
- You've lost a major customer or a number of important customers.
- Customer complain about quality, delivery delays, employee service, etc.
- You haven't gained any significant new customers in the past 6-12 months.
- Operating profits are way down or you're incurring losses. Profits have dropped faster than sales. Or your sales mix is now skewed toward less profitable products. (Keep in mind that accounting profits can be deceiving, especially in a small business.)
- Customers argue about pricing more than in the past and you've got to make price concessions more frequently.
- You're not completing jobs or delivering products on time. (A detailed analysis could turn up a number of reasons for the problem.)
- You're deferring maintenance on equipment, not replacing equipment that breaks down, or not replenishing inventory.
- You're cutting costs, not according to a plan, but simply because you know you can't afford to pay, or the supplier demands cash.
- There is not enough cash flow from the business to sustain operations. Many businesses have to finance operations at some time during the year. You have a problem if the seasonal losses extend beyond the usual time period.
- Customers are paying slower and slower and/or a major customer can't pay.
- You're taking less (or no) salary than in previous years and have to put money back in the business.
- You find yourself financing the business from more expensive sources--factoring, a third mortgage on your home, personal credit cards, etc.
- An increasingly larger percentage of your assets are less liquid (e.g., inventory is increasing, receivables are decreasing, etc.).
- Payables extend beyond the normal trade period. For example, paying in 45 or 60 days when terms are net 30.
- Vendors are calling asking (or demanding) payment.
- Your credit rating has deteriorated and creditors are asking why.
- Not making payroll deposits to the IRS or state on time. This is a serious issue and should be considered a cause for immediate action.
- You're not meeting your sale and/or profit forecasts. (Worse yet, you have no forecast.)
- The long-term outlook is not optimistic. Customers are shifting away from your product, the area in which you operate is in a long-term downward spiral.
- Not devising a plan to handle the situation. Is the problem internal--defective product, slow delivery, etc.--or external--new competition, decline in the overall market? External factors can be harder to deal with. If competition is stiff, you may find yourself in a bidding war where all suppliers are losing money. Or the market for your product may be drying up. Both of these factors necessitate drastic action.
- Valued employees are leaving.
- Is morale low among employees? Employees often see a problem long before management does.
If you spot one or more of these signs, take action quickly. Determine if it's a short-term issue that will turn around or a shift in the market where pressure will continue. You might be able to handle the situation yourself, but professional help should be considered. A couple of hours with your accountant or financial advisor might save your business. If part of the problem is insufficient cash to make required payments on a loan, you should talk to your accountant and the lender.
Copyright 2010 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject.--ISSN 1089-1536
--Last Update 01/15/10