Business Red Flags: Four Signs of Financial Trouble

In these difficult and unprecedented times, many business owners are finding out that the future is uncertain. You may be asking yourself:

– Is my business healthy? 

– Will we be able to make it through a recession? 

– Can we afford to stay in business if less people are spending money on our product?

These are all very important questions to be considering. If you’re not sure how to assess your business’s financial health, it’s a good idea to look out for these red flags as they may be the first signs of financial trouble.

1. Higher Debt Levels

Try not to make the mistake of borrowing more money that you can reasonably pay back. It’s important to keep a close eye on this because so many business owners don’t really realize how much debt they’re accumulating until they’ve dug their hole too deep to get out of. 

Large expenditures are easy to recognize, but also keep an eye on little charges that build up over time. Keep your debt-to-equity ratio well below 100%. You can calculate your interest coverage ratio by dividing your net interest payments by your operating earnings. If the number you get is more than five, this should raise a red flag.

2. Lower Cash Levels

Many people have less money to spend because of job loss and other financial complications caused by the coronavirus. Are they still buying your product or is it one of the corners many are cutting? 

Your cash levels will reflect any consistent loss of money, so keep an eye out. Remember: you need your cash holdings because they allow you to pay interest obligations and trade creditors.

3. Increase in Inventory or Accounts Receivable

If all of your assets are in inventory or accounts receivable, that’s a risk because there is no guarantee you’ll make any kind of a return on them. This is a sign that sales are low, which means revenue probably isn’t coming in as needed. 

4. Your Suppliers Only Provide Supplies Cash on Delivery

Sometimes your suppliers connect the dots and realize you’re having trouble financially before you’re ready to accept it yourself. They may begin to back away if you aren’t keeping up with your monthly obligations. There will come a time when they’re only willing to deliver to you if you pay upon receiving your order.

Who can help? Talk to Business Law Attorney at Maxwell Dunn PLC

If your business is starting to show the signs of poor financial health, you need to look at your options. The business law team at Maxwell Dunn PLC can help you better understand your situation and your potential strategies for overcoming it. 

If you’d like to learn more, we’d love to hear from you. Contact us today!