Businesses run out of profits, and owners are puzzled about what went wrong. While business losses are a big hit, they do not happen overnight. There are always signs alarming us of the worst to come, and a quick response is everything. Business owners need to read signs that declare the arrival of a financial crisis. Being proactive or at least prepared to face the worse is a crucial trait every business owner must develop.
Ignorance may be bliss, but not when it comes to financial matters of your business, and hence you must be watchful, reading the signs of trouble as soon as they first appear. This post covers nine signs of financial trouble that businesses often ignore. Make sure you know what they are, and stay prepared to fight them and save your business.
9 Financial Red Flags Every Business Must Watch Out for
1. You Are Not Making Enough Profits
While it takes some time for a business to hit off and start earning profits, it is a situation every person in business should be wary of. As apparent as it may appear, running a non-profitable business, in the long run, is a liability.
Once your business goes unprofitable for a significant time, funding business operations becomes challenging, and this is when you seek financial aid from sources outside the company. Unfortunately, this puts the business at risk of raising debts that cannot be paid, jeopardizing your financial situation.
2. You Are Making Profits, but Positive Cash Flow From Operations is Unachievable
Financial accounting is essential for businesses, especially when it is about the liquidity of the firm. A business that makes profits internally and struggles to maintain a positive cash flow. Finance and accounting experts highlight this as the most alarming sign of financial trouble.
It would be best if you had a reliable accountant working for you on the matter. You can always take the help of accounting outsourcing services and let the experts assess the situation.
3. You Have a Lot of Miscellaneous Expenses
Managing the cash flow is essential and also considers the balance between the money coming in and going out. All the business expenses must be analyzed for importance, frequency, and alternatives. The accounts and finance department must watch out for nominal fees that get clubbed together and become a loss-making head.
Some everyday expenses that are tabled under Other Expenses in a financial statement include:
- income tax expenses,
- interest paid on loans, and
- appreciation or amortization amounts
Suppose you have a large amount under Miscellaneous expenses. In that case, it shows that you are spending your money on not-so-important business tasks which should otherwise be saved for core business operations. Again, working with financial experts and hiring virtual bookkeeping services can help you assess and solve the situation.
4. Financial Management is Becoming Complex
While it is already a complex job, it can become even more troubling if you fail to manage your funds. Financial management failure is the core reasons business go rogue. Generating monthly financial statements or financial forecasts is essential for businesses, and you must do so to stay in business. Small loans from the market of exploitation of the Line of Credit can be highlighted easily when there are financial management problems.
Effective financial management strategies and implementing caps and cuts on financial borrowings and expenditures can help prevent future financial catastrophes.
5. You Have Unmanageable Inventory Levels
Rising inventory levels might please a business owner at first. However, they are a sign that you have more money invested in the goods than cash in hand. A successful business always maintains liquidity to cover debt obligations or unexpected expenses.
If you have rising inventory levels, you must evaluate if:
- the rate of product offering has increased
- less product is being sold
- there are damaged or obsolete items in the inventory
An inventory turnover assessment is recommended to check if you have the proper inventory levels. To do so, you must divide dividing last year’s ending inventory value by this year’s sales figure. If the result is on the higher side, you are either underselling or maintaining higher inventory levels than required.
6. You Have Increasing Outstanding Receivables
It is common to have a handful of outstanding receivables. However, when the list grows more prominent, it is a red flag you must address right away. Financial distress is coming if you have a lot of money stuck in outstanding receivables.
The more outstanding receivables you are expecting, the lesser money you have to fund your current operations. This creates an imbalance in cash coming in and going out, leading to more borrowing and exposing your business to external financial risks.
Businesses working with professional accounting outsourcing service providers have thoughtfully created credit policies in place. Before you enter into business with a client, explain the credit terms and have consistent follow-ups scheduled by the collection department.
7. You Have Limited Access to Finance
Preparing your sources to get finance at the right time puts you at risk of making losses. So instead, accounting and finance professionals recommend networking with financing facilities to fund your businesses when needed. You must make a contingency plan and look out for the following:
- Tying up with a finance facility when you are a profit-making business
- Nurture your relationships with the bank or finance facility and keep them abreast of your business profits and functions. This will help you shorten the process of finance approval when the need arises, as the bank would be well aware of your profitable operations.
- Extend the supplier terms- work on securing interest-free loans
- Use cash flow forecasts to predict cash flow shortages that are likely to happen.
You must check your business statements frequently and have a credible bookkeeper working on your day-to-day bookkeeping requirements. This will help you clearly understand your financial position at any given time.
8. You Are Unable to Pay the Debts
Even the most successful business has debts, but they have it always under control. If your debts are going out of control and you are running left and right to arrange cash for your needs, you are on the verge of being financially broke. You can do several things to increase the workflow, including:
- Ask the accounting service provider to prepare weekly cash flow forecasts. This will give you a clear picture of outstanding payments and their deadlines.
- Sell old stock
- Have a robust collection process for outstanding receivables
9. You Are Hampering Financial Transparency
Sharing the business’s financial status with key staff members can prevent your business from facing financial troubles. However, working on financial statements by yourself and ignoring the need for finance and accounting outsourcing services can be a big mistake leading to a financial crisis.
Be careful in dealing with your finances, as they are the most sensitive aspect of a business. Watch out for these signs of financial troubles and fight them off if you sense any. Virtual bookkeeping services can make things easier as they always work ahead of time and believe in financial forecasting systems.
The Daily Buzz combines the pursuit of interesting and intriguing facts with the innate human desire to rank and list things. From stereotypical cat pictures to crazy facts about the universe, every thing is designed to help you kill time in the most efficient manner, all while giving you something to either laugh at or think about!
Leave a Reply