How To Spot A Business In Distress

It’s always a shock to see a successful company go under, but this doesn’t happen out of the blue. There are always warning signs. The survival of your business relies on you being able to recognise them. The sooner you can spot financial trouble, the sooner you can start working on a solution. Nothing good ever comes from burying your head in the sand, so it’s best to get well-acquainted with the red flags. Here are seven warning signs that you’re dealing with a business in distress.

1. Refinancing

Let’s be clear: refinancing is common and it’s not always a sign of trouble, so long as you can afford the repayments. Borrowing money against the value of an asset is a sensible way of lowering interest rates. And it helps to free up cash for your business.

It’s when you find yourself refinancing frequently that you need to worry. It indicates that your company is in poor financial health and struggling to make ends meet. What’s more, lenders grow suspicious of businesses that need to refinance all the time. And your credit score can take a hit, worsening your problems.

2. Poor Cash Flow

Cash flow is the lifeblood of your business. It’s the key to survival, investment, and growth. You need enough cash to cover your outgoings or you risk mounting debt.

Negative cash flow is part and parcel of launching or expanding your small business. So it’s accepted for a short while. But, your business can’t survive indefinitely without income. You need at least enough cash to cover your outgoings to keep your company afloat.

For small businesses, cash flow can often be unsteady – all it takes is a few late customer payments to rock the boat. It most definitely pays to be wary of premature expansion and overspending. These factors can significantly affect your cash flow.

3. Creditor Pressure

Being chased by creditors is a clear sign that your business is in financial distress. When you’re dealing with an imbalanced cash flow, it can be tempting to delay your payments. But this is short-sighted and often sparks a vicious cycle of financial problems.

It’s in your best interests to stay in your creditors’ good graces. Late payments can result in a poor credit score, which will make it difficult to secure loans in the future. Moreover, creditors won’t hesitate to chase you down or resort to legal action to claim what they’re owed. This is disastrous for any small business. So stay focused on the bigger picture and make your repayments on time.

4. Over-Reliance on Individual Projects or Contracts

A healthy business has more than one source of income. It will also have recurring income from several clients. Whilst losing contracts is never ideal, it shouldn’t have the power to break your business. If the financial health of your business depends on one source of income, it’s a sign that you’re heading for trouble.

Focusing all your efforts on securing new customers is also a mistake. Especially if this is at the expense of existing customers. It’s always unwise to antagonise your current clients. Studies show that customer acquisition can be 95% more expensive than customer retention. Increasing customer retention rates by 5% increases your profit by 25-95%. Nurturing your current clientele is vital for the financial health of your business.

5. Low Staff Morale

Employee morale is often one of the most accurate indicators of how your business is doing. It’s important to keep your staff satisfied. Reduced hours, contractual changes, and pay freezes are signs of a business in trouble. As a result, morale plummets, with further troubling consequences for the company.

6. Unhealthy Office Atmosphere

Low office morale causes productivity to take a nosedive. Absenteeism begins to rise, which exacerbates the problem. Staff spot that things aren’t going well for the business and may decide to jump before they’re pushed. leading to a high staff turnover.

7. Your Customers Know Something’s Wrong

Your customers are smart. It won’t take them long to notice dissatisfied employees. Or that they’re getting less for their money than they used to. Unhappy customers won’t hesitate to defect to your competitors. And word about your financial trouble may get around fast. This is the last thing a struggling business needs, as it can be the final nail in the coffin.

Summary

None of these signs is an automatic death knell for your business. But, if you spot several of these problems at once, it’s time to take action. The sooner you fix these issues, the quicker your business can start to recover. Don’t wait for word to get around; put out the fire before it spreads.

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