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Do you know the Early Indicators that your Business is on the brink of Financial Crisis?

September 23, 2018

When running a business, it is important to monitor your business operations at all times so that you’ll be aware of the early warning signs that may indicate a brewing financial crisis.

There are actually multiple signs that could indicate financial problems if you know where to look. But more often than not, business owners ignore or unknowingly ignore these signals. These signals are important to know so you can take proactive action before it is too late and help your business towards recovery.

Scott Scherrer makes a strong point when he argued that 80% of business failures are a result of mishandled internal elements. According to him, cash shortage has always been associated with poor collections or lack of sales but the truth is, the usual transgression points to a problem buried deep in two business systems: management and bookkeeping information.

Let’s take a look now at the signs your business is starting to experience a financial crisis.

Negative Numbers in Operating Cash Flow

A negative operating cash flow can give the company a signal that operating expenses have not been turned into cash profit yet. For example, buying $100,000 of goods results in a negative cash flow of $100,000; when the company sells that inventory for more than its cost, the cash flow becomes positive, and the company makes a profit. Obviously, if the company fails to convert these inventories into sales, it runs out of cash and the company eventually becomes insolvent.

Operating Income Inadequate to Pay Operating Expenses

This is an important indicator because it gives business owners and creditors an idea of how the business’s operation is performing. Remember, even if a business shows a profit for the year it doesn’t mean that a business is in good shape. It could actually mean the opposite. For instance, a business might be losing customers and downsizing and starting to dispose of their assets. They may show cash flow positive but this business’ end is near as they will not be able to sustain the operating profit they earned from the previous period with the limited productive assets left in the business. This business is not in a good shape.

Debt Dependency

Most company suffering from financial crisis rely on borrowing funds to meet other business expenses such as wages, inventory, leases, etc. because it is not generating enough operating income internally. Selling but not collecting payments from customers quickly enough may resort to relying on credit cards advances to survive.

Drop in Sales or Conversions

It is normal for some company to experience a drop-in sale during certain periods of the year. If your business is experiencing lower than average sales, then it’s time to analyze your business, improve your income, explore other marketing initiatives and look at what your competitors are doing.

These are various warning signs to always keep in check. Reviewing sales performance, monitoring the market and emerging trends and opportunities as well as potential threats is a continuous process.

If you need help in establishing internal processes and internal control in your business to ensure that you have an established management information system to identify the early indicators of a financial crisis, we can help you. Contact us today to get started.