Early-Warning Signs of a Troubled Business
Over my long career as a forensic and managerial CPA, I’ve had the opportunity to work with several hundred business clients. Some of these companies were hugely successful. Most, however, operated at various stages of distress, from early-stage struggles…to the ulcer-causing and crisis-level troubles that sometimes contributed to complete failure of the enterprises. Experience has taught me that serious organizational problems, and perhaps the ultimate closing of a business, can be averted if the management team and its advisors proactively look for and respond to signals that point towards current or imminent factors that might lead to a thoroughly-troubled situation. Listed below are ten early-warning signs to be alert for:
Management slippage - When owners/managers begin to consistently step away from the daily, close monitoring and managing of the business…look out! It can be the beginning of the end when it’s assumed that the business can run on auto-pilot or by casual, off-site management.
Planning/budgeting deficiencies - Show me a business that doesn’t have an effective methodology for anticipating and charting its course over at least the next 12-18 months, and I’ll show you one that may well be headed for choppy waters.
Weak accounting and reporting - Timely, accurate, and meaningful financial information and operating metrics are critical ingredients to an early-warning system. Think about it, if a football team didn’t know it was behind by two touchdowns with two minutes to go, how in the world could the coach expect to respond sufficiently to avoid losing the game
Responsibility and accountability issues - I’ve seen way too many companies that lack clearly-defined roles and responsibilities and/or an effective process of overseeing actual performance of departments and individual executives, managers, and staff.
All eggs in one basket - If one customer, client, product-line, project, vendor, or technology represents more than 20-40% of the company’s total, the untimely loss of that key contributor can be a precursor to severe problems ahead.
Increasing customer complaints - Deteriorating customer service, evidenced by more-and-more unhappy customers…even with relatively minor issues, is not something to be ignored.
Financial ratio declines - A well-thought out battery of ratios that track targeted and actual results for such things as working capital, inventory and A/R turns, debt-to-equity, gross margins, operating income, and other measures is critical for monitoring the health of any company. If this system highlights negative trends, or if such a system is not in-place, chances are good that worsening problems lie ahead.
Cash shortfalls - Most businesses will experience cash shortages from time-to-time. While not necessarily an indicator of trouble on the horizon, it definitely could be, especially if the fund deficits become increasingly routine and severe.
Decreasing employee morale - Company personnel at the executive, manager, and staff levels, in healthy businesses typically exhibit enthusiasm, cooperation, and good attitudes. When negativism, complaining, finger-pointing and other problem behaviors are observed among the company troops, be alert for current and growing troubles that can spell doom for the organization.
Lender unrest - Is the company receiving more frequent queries and visits from its secured and unsecured lenders? This could very well be a sign that these stakeholders are observing negative trends in financial ratios, management capability, and other facets of the business.
The message here is that business crises, and sometimes bankruptcy or complete business collapse, can oftentimes be averted if troubles are detected far enough in advance. As symptoms are timely identified, management can then be in a position to research potential problem areas to determine the depth and breadth of the issues. Then, and only then, can proper remedies be planned and implemented to help resolve the problems.