If you recognise a business is struggling early enough, you can make changes to improve the situation. But ignoring the warning signs for too long could mean the end of the company, especially in the current economy.
Over 300,000 Australian businesses closed in 2022, a statistic expected by many to expand this year. While personal reasons and other factors account for some of these closures, the significant cause of business closures can be classified as financial problems.
In many cases, this is not a simple case of the business needing to make more money. A survey of CEOs of failed SMEs found that 14% blamed the failure on poor financial management rather than inadequate planning, marketing, or sales.
A struggling business is likely to be suffering in ways beyond cash flow. Stress on the business means stress on the employees, which can impact morale and productivity while also causing strain on customer relationships. Operations may become disorganised, innovation may slow as resources are diverted to meet short-term demands, and recruiting and retaining staff becomes increasingly tricky.
Businesses often struggle for months or even years before they close their doors. But there can be signs that something is wrong long before insolvency becomes a real threat. Keep an eye out for the following warning signs:
- Cash flow problems — Late payments, difficulty meeting payroll and other financial obligations, borrowing money from banks and/or investors to stay afloat could all be signs of financial stress.
- Declining sales — If your sales are declining over a period and you business is not seasonal in stock, that's usually a sign that something needs to change.
- Costs increasing more rapidly than revenue — This could mean the business is failing to keep up with expenses, and its cash flow is becoming unsustainable.
- Late filing of financial statements — Failure to submit accounts on time could indicate that there are issues with financial management.
- Late payment of suppliers or creditors — If your business isn't paying suppliers or creditors on time, it could be a sign that something is wrong.
- High turnover of staff — High turnover rates can indicate poor morale and management, which could lead to financial problems.
- Cancelled orders — If your customers are cancelling orders or taking longer to pay for them, it could be a sign that they are feeling financial pressure too.
Be proactive in monitoring these signs of financial stress and take decisive action early to improve the chances of turning things around.
Insufficient cash flow is not always the best indication that a business is failing. Rapid growth is a sign of a healthy business but can also cause financial pressure. If you're experiencing cash flow problems, it's crucial to take action and develop a plan of attack.
There are many strategies you can use to address the financial pressure on your business:
- Cut costs — Reviewing your expenses and identifying areas where you can cut back can help free up much-needed cash, but keep an eye on metrics to make sure the cuts are in the correct places/
- Secure additional financing — Applying for a loan or seeking investors can provide additional funds to cover short-term expenses.
- Negotiate with creditors and suppliers — You may be able to negotiate better payment terms or discounts with your creditors and suppliers.
- Manage debt more effectively — Keeping on top of your debts is essential. Ensure you know when payments are due and negotiate flexible payment plans with your creditors.
- Increase sales — Boosting sales can generate more revenue to cover expenses.
Consider leasing needed business equipment instead of buying it. Leasing services like GRENKE allow retail, healthcare, manufacturing, and other businesses to pay for equipment in instalments over a flexible period.
This allows you to plan your finances more effectively and free up working capital to help you through difficult times.
It is essential for business owners to recognise financial pressure and develop a plan of action to protect their business from potential damages. Planning for the future and taking proactive steps to better manage your cash flow and finances can help ensure your business remains profitable and successful.