Early identification and action can dramatically alter the outcome for businesses facing potential financial difficulties. Recognising the initial warning signs of financial distress may be the key to a full recovery for business owners navigating uncertain financial waters.
Across our two decades of experience, we have seen the following recurring issues snowball into urgent financial situations if they are overlooked as insignificant. Use the list below to check if it may be time to seek professional help for your business.
Cash flow issues
One of the most apparent early warning signs of financial distress is a consistent cash flow problem. This might manifest as difficulties covering daily operational costs, delays in payments to suppliers, or an increasing reliance on overdraft facilities.
Example: Due to declining sales, a retail company consistently uses its line of credit to cover basic operational expenses like rent and salaries. Despite high inventory levels, cash isn’t being converted into profit fast enough, leading to a dangerous cash flow shortfall.
Keep a keen eye on delayed client payments, increased outstanding invoices, or sudden revenue declines. Address these issues promptly by managing accounts receivable efficiently and maintaining transparent communication with clients.
Accurate cash flow forecasting using realistic income projections is essential to prevent surprises and prepare for reality.
If your business consistently spends more than it is earning or is juggling funds to manage day-to-day expenses, it might be time to seek professional advice.
Increasing debt
An increase in company debt levels, especially if it becomes unmanageable, is a clear indicator of financial stress.
Suppose your business is taking on new debt to pay off existing liabilities or facing higher interest payments that consume a significant portion of your revenue. In that case, these are signs that your financial health may be compromised.
Example: A construction firm takes on several high-value projects simultaneously, funding these with significant bank loans. However, delays in project completion and payments lead to rising interest costs, which consume a disproportionate amount of the company’s revenues, making debt repayment increasingly challenging.
An unsustainable debt load can impede a company’s ability to operate efficiently.
Monitor your debt-to-income ratio closely and consult a financial advisor if you notice a worrying trend.
Changes in credit terms from suppliers
Suppliers typically adjust credit terms based on their perception of a business’s financial stability. If your suppliers shorten payment periods, require cash on delivery, or reduce credit limits, it could indicate that they perceive your business as a credit risk.
Example: Previously, a manufacturing business enjoyed 60-day credit terms with its material suppliers. Due to late payments, suppliers have reduced the credit period to 30 days and require a 50% deposit on orders, significantly straining the company’s working capital.
This shift can strain your cash flow and signal deeper financial issues.
Declining sales
A consistent decline in sales, particularly if not due to external economic factors, suggests a need for immediate attention. Sales figures that continue to fall quarter after quarter are a sign that market dynamics might be changing or your business might not be effectively meeting customer needs.
Tracking these trends and analysing the underlying causes can help identify whether these are temporary setbacks or signs of prolonged distress.
As a business owner, it’s critical to review your financial statements regularly, control costs, and seek ways to increase efficiency.
High employee turnover
While often overlooked, high employee turnover can be symptomatic of a business’s deeper financial or managerial issues. If key staff are leaving, or if there is a general increase in staff turnover, it might reflect uncertainties about job security or dissatisfaction with the management’s handling of the business’s finances.
Example: An advertising agency experiences a wave of resignations from its top talent, including senior managers. The instability makes it hard to attract experienced professionals, negatively impacting service delivery and client satisfaction.
Difficulty in raising capital or securing loans
If lenders are reluctant to extend credit or if you find it increasingly difficult to attract investors, this could indicate a lack of confidence in your business’s financial health.
Financial institutions often have rigorous methods for assessing risk, and their hesitation can serve as a critical indicator of your business’s perceived stability.
Increasing legal challenges
An increase in legal challenges, such as disputes with creditors, lawsuits from suppliers, or actions from landlords over unpaid rent, can also signify financial trouble.
Example: A technology startup faces multiple lawsuits from software vendors for unpaid licenses and service fees. The legal fees and potential judgments threaten to exhaust the company’s limited financial reserves.
Legal issues not only drain resources but also distract from your business’s core operations.
Act on the warning signs for a full recovery
Recognising these signs of financial distress early is key to preventing a more severe crisis.
At SALEA Advisory, we specialise in helping businesses in Sydney navigate through these challenges with strategic advice and compassionate support. We are committed to providing personalised services that address the unique needs of small business owners, mortgagees, and lenders.
If you see these warning signs in your business, it’s crucial to act immediately. Contact SALEA Advisory for a comprehensive evaluation and expert guidance to steer your business back to financial health and stability.
Remember, the earlier you seek help, the more options you may have available to turn your situation around. Contact us today.
