Danger Ahead: 4 Red Flags That Signal Your Company is in Financial Trouble
Taking a good long hard look at your financial statements can be extremely beneficial in getting a realistic picture of where a company is heading from a financial standpoint. Specific “red flags” in your finances can easily be spotted in your monthly or annual financial statements. You just have to know what you are looking for and take the time to review your bookkeeping records.
- Rising Debt Levels
Some companies end up taking on more debt than they can handle. However, you may not realize just how far in the red you may be until it is too late. Many companies engage in minimal credit transactions periodically. A large purchase is easy to spot, but small credit arrangements can build up over time and can be just as detrimental. Your debt to equity ratio should never be over 100%.
You can also look at the interest coverage ratio, which you can calculate by dividing your net interest payments by operating earnings. You should have concerns if your ratio is more than five.
- Dwindling Cash Levels
If you are losing money consistently, your cash levels will show it. Keep an eye on how much cash you have each quarter compared to last year. If it is gradually getting lower, that may be cause for concern. Keep in mind that cash holdings are essential to pay interest obligations and trade creditors.
- Increase in Inventory or Accounts Receivable
Having all of your assets in inventory or accounts receivable can be risky. There is no guaranteed return on either of those assets. If you have several customers who do not pay their bills, you may end up with bad debts that significantly impact your bottom line. Having too much inventory can also be a sign that sales are low or that revenue is not coming in as quickly as desired.
- Suppliers Will Only Provide Supplies C.O.D (Cash on Delivery)
If you are having trouble keeping up with your monthly obligations, your suppliers will begin to notice. At some point, they will only continue to work with you if you agree to provide cash for each order before delivering it to you. Paying on credit makes your finances easier to manage, but it also shows that you have a good relationship with your suppliers. If that relationship deteriorates, it could be a sign of financial trouble
It is a good idea to speak to the team at MaxwellDunn if you are concerned about your company’s finances. We offer business advisory services and have unique experience with businesses that may be heading toward financial trouble. Contact us as soon as possible—don’t wait until bankruptcy is your only option!