Insolvency specialists will tell you that business failures don't show for months if not years after an economic downturn as business owners struggle to hang on.
A business can go broke for many reasons but one consistent factor is the owner's fail to recognise the warning signs and take appropriate action.
Here are a few of the key indicators to help you read the writing on the wall:
Budget for the year looked great but actual performance is ugly – You need an operating and cashflow budget, as one does not necessarily mirror the other. Your budgets need to be rigorous and realistic. Measure performance against budget every quarter (or monthly where things are volatile). Where deterioration occurs, act on it.
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.
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 discounting strategies as they can have a major impact on your gross profit levels.
Funding your business with debt rather than equity finance – if your business is funded on debt it's easy to strip the profits out of your business. Watch your funding mix and review debt regularly.
Falling sales – If sales are falling rather than launch into knee jerk campaigns have a look at what the actual problem is – competition, product mix, market changes etc? Then put in place to manage these strategies.
Delaying payment to creditors – if sales are ok there could be a number of reasons why cash is tight. Debtor cycles are often a problem that needs to be addressed.
Issuing cheques in excess of your banking facilities – in other words, trying to pay todays bills with tomorrow's cash. High growth businesses often come under pressure but the solution is negotiating with suppliers and the bank rather than hoping for the best.
Poor financial reporting – if you don't recognise a problem is occurring you can't address it.
Growing to death –
Growth, like anything else in the business needs to be planned. If it's not planned it's unlikely you can sustain it.
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.
If you need assistance with planning, establishing reporting processes, identifying KPIs or other small business matters, contact us on 02 9957 4033.
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Last updated February 2012. This article is provided for information purposes only and should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.
This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.