11 early warning signs that your start-up is in trouble

We’re seeing a steady stream of businesses falling over. Last year was a horror show for many small businesses, with recent figures showing that corporate insolvencies jumped by 9.2% compared with 2010.

None of these firms planned to fail and in many cases they did not see the early warning signs of problems. Having a good radar system is an essential management skill for SMEs.

You may not have all of the accounting resources of a larger company, so knowing what to look out for can be a business life saver.

A business can go broke for many reasons but here are 11 key indicators that problems may be on the way: 

1. Budget for the year looks great but actual performance is ugly

You need an operating and cashflow budget to manage performance.

One budget may not necessarily mirror the other.

Your budgets need to be realistic and you need to measure performance against budget regularly and frequently.

Where there is a deteriorating trend, act on it early. 

2. Increases in fixed costs without an increase in revenues

Fixed costs have a direct impact on your profitability.

If you increase your fixed costs these need to be linked to revenue and profit expectations.

You also need sufficient capital or funding to cover these costs if increases are needed to facilitate growth. 

3. Falling gross profit margin

Your gross profit margin is the difference between your sales minus cost of goods sold.

Every dollar you lose in gross profit is a dollar off your bottom line. Watch your discounting strategies as they can have a major impact on your gross profit levels. 

4. Funding your business with debt rather than equity finance

If your business is funded on debt it’s easy to strip profits out of your business with interest costs.

There’s nothing wrong with debt funding. It just needs to be managed.

Watch your funding mix and review debt regularly. 

5. Falling sales

If sales are falling, rather than launching into kneejerk marketing campaigns have a look at what the actual problem is – competition, product mix, market changes?

6. Delaying payment to creditors

If sales are okay there could be a number of reasons why cash is tight.

Debtor cycles are often a problem that needs to be addressed.

When you start to defer creditor payments this is an early signal that things are not well. 

7. Issuing cheques in excess of your banking facilities

Trying to pay today’s bills with tomorrow’s cash.

High growth businesses often come under pressure but the solution is negotiating with suppliers and the bank. 

8. Poor financial reporting

If you don’t recognise a problem is occurring you can’t address it.

You need to have good coverage across your numbers and have access to regular financial reports. 

9. Growing to death

Growth, like anything else in the business needs to be planned.

The faster you grow, the higher the risk. 

10. Substantial bad debts or dead stock

Customers that won’t pay their bills and stock that you can’t sell.

Credit policies need to be enforced.

Remember, the sale is not complete until the money is in the bank.

Managing dead stock is about planning. Make sure you have a tight stock policy in place that is measured and monitored. 

11. Not paying tax debts

The Tax Office is not a “quasi bank”. It might seem easy to miss a tax payment, but it will come back to bite you.

When a business gets into trouble the key is early detection and then making sure that your solutions are focused on the real problems.

This will give you a chance of recovery. Too late is generally fatal.

Greg Hayes is a director of Hayes Knight and specialises in taxation & business planning advice.