The 9 biggest financial warning signs
21 November 2014
Posted by: Author: Brian Hamilton
running a business, the ultimate sign of financial distress is usually running
out of cash – you just don’t have any money left. However, even though it seems obvious,
running out of cash is almost always a symptom and not a cause of business
article, I outline a few warning signs that financial trouble is nearby (or
that’s it has already started). I’ll
start by identifying a few telling symptoms, and eventually go down to the
typical root causes of financial distress.
1. You’re struggling to be
I realise in
advance that this is very obvious. Yet,
in a market where it is easy to raise capital, this is not always an incredibly
clear one– it is sometimes lost on even talented business people. No matter what anyone claims, an unprofitable
business is, by definition, a business at risk.
When there isn’t a clear path to profitability, the business is forced
to raise money outside of itself, which opens up an entirely different world of
risk. The business relies, not on
itself, but on others.
2. Your margins are slipping
(gross or net).
A margin is
taking a profit number and dividing it by sales. Gross profit margin (gross
profit divided by sales), usually measures a company’s ability to manage its
most important costs. Margins are always expressed as cents on every sales Rand. Net profit margin is a company’s net profit
divided by its sales. Often, the net
profit margin of a company is far more important than the amount of Rands in
profit that a company is earning. This
is because net profit margin is typically an indicator of how profitable a
company will be as it grows. In my
experience, even financial professionals do not put in enough time into
understanding margin performance.
3. Your sales are stagnant or
is an obvious one, but healthy businesses grow.
Like the biology of plants, something is either growing or dying. Sales Rndss are used to pay for expenses, so
there is a clear financial impact of not having as much sales money available
to pay for expenses; however, the very dangerous part of sales stagnation or
decline is that it usually indicates a lack of customer acceptance, which is
key to any business. There is no better
barometer of market/customer acceptance than revenue
4. Your rate of sales growth is
something to watch out for, and it’s a fairly subtle point. Even if your sales are increasing, you have
to keep an eye on the rate of growth. Is
your sales percent change higher, year over year, for this year, than it was
If not, it
may be a symptom of financial issues.
One very important note: it’s natural for companies, as they grow
bigger, to start seeing their rate of sales growth go down. It’s much easier to "double” your sales when
you had R10,000 in revenue last year than it is when you had R100,000,000 last
year. Still, it’s important to keep your
eyes on the rate of growth.
5. You are profitable, but do not
have positive cash flow from operations.
take too many words to explain this in full, but it is very possible to be
profitable and still not be generating positive cash flow. At some point, all businesses need a good
accountant—one who is experienced in financial analysis and who can help you
navigate through this issue of liquidity.
accountants are good at financial analysis, so this may take some digging on
6. Renewal sales, inbound leads,
or other metrics related to market acceptance are flat-lining.
companies live and die on the stickiness of their product— i.e., repeat
business and word of mouth. The market
tends to be efficient, and customers tend to make good purchasing decisions. A company should have metrics by which it can
evaluate how solid its customer relationships are.
businesses have unique ways to measure the stickiness of customer base –
renewals, repeat business, Yelp ratings.
metrics start sliding, it will eventually have serious financial consequences
and will likely manifest itself in some of the symptoms listed above.
7. Your employee turnover is
true that each industry will have specific challenges and rates of employee
retention, significant changes in employee turnover tend to be an early warning
sign that a business is in trouble.
Sometimes this is measured, erroneously, by changes in key
personnel. I’m more interested in
overall employee retention changes.
8. The product or service you offer is
decreasing in quality.
objective metrics to measure the quality of your product. This is very closely related to point number
6. Ultimately, marketing, public
relations, and "buzz” can only help you to a certain extent. The product’s quality should speak for
You want to
be offering a product whose quality is so high that, in order to lose, you have
to virtually everything else wrong. This
must be tracked internally by the company, not just by customers.
office/workspace/headquarters looks messy.
previous consulting career, I got to the point where I could walk into a
business, and pretty much know immediately if it was doing well or not. Are the bathrooms clean, are the floors
clean, what’s the condition of the paint?
Do people care about the company? You’ll be able to tell by how they
treat their workspace.
This article was originally
posted on entrepreneur.com.