Ten critical signs a company is in financial distress

Many businesses throughout the globe have witnessed financial devastations during the Covid-19. In comparison, healthy businesses take proactive measures to avoid financial disruptions because of the Covid outbreak. It shows the significance of being aware of business vulnerabilities to take proactive steps in critical situations. This blog will discuss the top ten signs of a company is in financial distress.

Financial distress – Financial distress refers to a business or individual situation where they can’t generate sufficient revenue to meet the essential expenses because of some reasons. A company could face financial distress because of internal issues like economic downturns, illiquid assets, revenue sources sensitive to multiple economic factors. And it could also happen because of external issues like government policies, covid restrictions, or environmental agency restrictions.

Ten critical signs a company is in financial distress

Ten critical signs a company is in financial distress

It’s critical to identify the signs of a company in financial distress as early as possible to mitigate the financial losses to a minimal level. Whether you’re running a company or finalizing a deal with a third-party business, identifying the signs a company is in financial distress can help you avoid financial losses or signing a business deal with a financially unstable company.

Let’s have a look at the top ten alarming signs of a company in financial distress,

signs a company is in financial distress

We have enlisted down the warning signs of a company in financial distress. You may need to be close to third-party businesses to identify the enlisted signs of financial distress timely. And you can also take the help of professional third-party agencies like Verifyfull to recognize the signs of a company in financial distress.

1.   Cash Flow Issues

Cash flow disturbance is an early warning sign a company is in financial distress. Many businesses face periodic cash flow issues because of the market dynamics, but ongoing cash flow issues hint at the company’s financial distress situation. How can a business survive too long when it spends more than its earnings? Suppose your company or a company in your business chain seems continuously struggling to meet its financial obligations. In that case, you may look at the cash flow issues to avoid any business disaster.

We have enlisted some critical issues that generally causes to drain the cash resources of a company,

  • Debts with high interests’ paybacks
  • Inadequate financial decisions
  • Heavy spending for business operations
  • High account receivables

Improper financial decision-making is the leading factor behind the reasons mentioned above to drain a company’s financial resources.

2.  Unable to pay bills

Forgetting to pay bills or missing payments because of other issues is pretty normal for many companies. But it could be an alarming sign if a company frequently misses bills. That indicates the company’s financial distress situation where they cannot pay bills and head towards liquidation. Whether a company is getting defaulter to vendors or loan-providing financial institutions, it will liquidate. When a business gets liquidated, it could damage multiple businesses by disturbing their supply chains. That makes it critical for businesses to look at the alarming signs a company is in financial distress before making a company part of their supply chain.

Ten critical signs a company is in financial distress

Ten critical signs a company is in financial distress

3.   Significant rise in debtor or creditor days

Late payments are better than not paying, but it will let your supply chain partners get a hint at the financial distress situation of your company. Extending either debtor or creditor days will have a devastating impact on your business. If you delay payments to suppliers, they will disrupt the supply chains by cutting off the supply of major components essential to ensure the steady flow of your business. Similarly, if your company fails to timely collect payments, it will create cash flow issues.

That’s why a company should take notice of sudden changes in creditors’ & debtors’ numbers to find & mitigate the issues. But you may judge a business’s performance by keeping its peer performance and the market conditions in view. Sometimes, a company may struggle because of the economic downfall of the overall market and needs time & support for revival.

4.   High-Interest payments

If a company continuously gets high-interest debts to make essential payments & for business operations, it hints at its worst financial health. High-interest debts show that financial institutions like banks & other loan providers have a lack of trust in a business cash flow. Banks & loan providers increase the loans’ interest rate with the increasing risk. High-interest debts will shake the trust and business relations with its collaborating companies. And it will also drain out the company’s cash resources to leave it trapped in financial distress.

If a lender asks to pledge valuable assets or a stronger personal guarantee on the debited money, you may take serious notice of your company’s financial health. When financial institutions are not trusting your company’s viability, it means something is wrong with your business structure or operating style. You take timely action to review the cash flow and the company’s structure & working style to mitigate the potential issues.

Ten critical signs a company is in financial distress

Ten critical signs a company is in financial distress

5.   Low Margins

It’s not a business sales volume but the margins or profits ratio that shapes the future of a business and makes it viable for the long-term race. If a company fails to generate margins or generates too low margins, its production cost is high enough to disrupt the business model. Higher sales volume with a minimal margin ratio can’t help businesses sustain in the market for too long but in exceptional cases with minimal business operational costs.

A business needs to generate convincing margins to sustain itself in the market for too long. You need to review the business model to minimize the production cost & maximize the margins by maintaining the competitive market prices on your products.

6.   Unfeasible Operational Cost

You may consider it a brave & smart business move to increase the marketing and inventory budget, and it feels justifying if your company has reasonable capital. It feels appropriate to increase operational overhead costs to boost the business instead of keeping the money in banks.

But some businesses start spending resources unfairly in their initial stages. It could lead businesses to financial distress, especially when they increase spending without getting a proportional increase in their revenues.

You may look at the revenue pattern of your business throughout the year. Many businesses have varying revenue-generating patterns with their off & on seasons. Try to match up the business spending pattern with its revenue-generating patterns. If your business has an off-season for a few months every year, you may plan to cut down its operational expenditure for that time to balance the cash flow.

Balancing the ingoing & outgoing cash flow can help a business avoid increasing overhead costs & financial distress.

7.   A significant decrease in sales

A significant downfall in sales is an alarming sign a company is in financial distress. If a business is not getting money in the cycle by selling products or services, it will ultimately fail to meet even operational businesses’ costs.

You may take quick notice of decreasing sales to find the critical issues behind it. It’s critical to know that a decrease in sales is because of the off-season or global issues (like Covid). You can hope to get the situation better in that scenario.

But there could be a failure in marketing or understanding the need of the market. Failing to generate what customers needs & expects from you or marketing failure are the crucial reasons behind getting a significant downfall in sales. You may review the marketing funnels design after every quarter year. And study the market dynamics to better understand the need of the market.

8.   Insufficient Repeated Buyers

Repeated buyers are the positive signs for a business thriving in the right direction. Insufficient repeated buyers are a serious threat that can lead a business to financial distress. Repeated buyers are essential to make a business viable for long-term survival. They indicate the potential market’s trust in a company’s quality products or services.

Insufficient repeated buyers show inviability of a business heading to financial distress.

If your business has insufficient or 0% repeated buyers, it’s an alarming sign hinting at the company’s improper business management or bad quality products or services. You may review your products & services quality to make them up-to-mark and ensure to improve customers dealing & management.

9.   The rise in receivable accounts

Businesses need money to keep running; a business can’t survive for too long with increasing receivable accounts. It is applaudable to get a boost in sales, but getting sales with receivable invoices means a shortage of cash that leads a company to cash flow disruptions.

You can’t run a company with receivable invoices; it needs cash to buy inventory & meet the operational expenses. Follow the strict credit policies and have an efficient team that makes routine follow-ups to timely collect the receivables. And, don’t make big business deals without getting the appropriate credit terms.

10. Stressed Employees

Business owners & employees can sense the financial distress, and they may make quick policy changes to get the business back to track. You may see many senior & executive level employees switching jobs in a short interval of time. It shows that employees know something went wrong & they’re trying to get a safe exit before the company liquidation.

Ten critical signs a company is in financial distress

Ten critical signs a company is in financial distress

Final Words | signs a company is in financial distress

We have discussed the alarming signs of a company in financial distress. These signs will help you look at your business & its’ supply-chain partner companies financial health and take timely actions to avoid financial distress.

You may notice that all the above-discussed reasons that lead a company to financial distress are linked. A business can’t avoid financial distress by mitigating one issue & ignoring the other; it needs a collective approach to notice all the above-discussed signs and take appropriate actions for mitigating these business disrupting factors.

You can take professional companies like Verifyfull’s help to recognize the signs of financial distress of the companies with which your business is going to collaborate.