Spotting the warning signs of business failure

This is a guest post from Business Recovery the business turnaround specialists.

As failure sinks in and the business sees itself sliding down the graph, the symptoms of failure become more apparent in the books through declining sales, cash and increased expenses.

Looking at the accounts should not be the first symptom of failure as accounts capture a moment in time and is based on history.  In other words financial accounts look back in time at what has already happened and too late to be able to change these results. 

There are some companies, especially smaller companies that report on their sales and profits once a year when completing a tax return. 

So the warning signs of failure to an investor or bank providing a business loan are often seen too late and often too late for anything to be done.

The warning signs of failure should be seen right from the start so there is a chance to avoid failure happening.

There are pointers below to address the potential risk of failure for a business:

1. What are the symptoms of business failure for a specific business?

2. Health check of business to detect warning signs

3. What are the causes of business failure?

4. What is the seriousness?

Early signs of business failure are detailed below.  By recognising these signs, action can be taken.

Underperformance

Definitions of underperformance include:

  • Sales are dropping or stagnant
  • Bank is asking for security against lending and asking more often for updates
  • Profits declining
  • Not winning new business

Distress

Definitions of a company being in distress include:

  • Turning to an overdraft for immediate funds or increase in overdraft
  • Payments to suppliers are not on time or asking for increased repayment terms
  • Turn to lease and hire purchase companies instead of purchasing an asset outright
  • Considering factoring and invoice discounting as a method of business recovery and to gain monies in the short term

Crisis

A company is in a crisis when a finance director leaves.  This is sometimes and not always because there are genuine reasons.  Other signs of crisis is when the overdraft has reached its maximum level and there are no other funds available such as loans.  A bank loan may no longer be available either and all funding options have been considered and are not available.

A company cannot meet repayments of its creditors and suppliers are demanding payments and threatening taking legal action.  Furthermore statutory payments such as PAYE and VAT are in arrears.

Legal action will begin with county court judgements, statutory demands for payments and finally bailiffs taking assets that are needed to run the business.

The next step would unfortunately be insolvency and FAILURE.

Performing a health check on a regular basis can avoid insolvency happening and it is the last stage when all else fails.  There should be plenty of alarm bells ringing loud before this stage comes anywhere close. 

If a business is suffering from any of the symptoms outlines, a business should seek external advise and also come to agreements with suppliers.

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