Following every bad debt or loss due to insolvency: directors, suppliers, customers and employees almost always ask themselves: Could we have seen it coming?  Could we have predicted the company was in trouble? What were the distress signs that we missed? 

Well, here are the top six signs of company distress I look out for... there are no real surprises.

1/. Financial Statements including Management Accounts

Not understanding, or not accurately preparing, financial statements. 

A sports team would not compete without a precise way of keeping score.  But, incredibly, many troubled companies operate without having accurate financial statements that the owner fully understands.

Understanding that when cash payments exceed cash income there is a negative position and if it continues to be negative the company will become illiquid.  Without new capital from equity investors or lenders a company can quickly find itself in serious financial straits.

Long delays between when a company spends cash to grow its business and when it collects cash receivables from resulting sales can stretch cash flow.  Working capital can decline and become negative as accounts payable grow at a faster rate than stock and accounts receivable.

Poor cash management should be interpreted as a warning that a company could become distressed.

The Lesson

Ensure that management accounts and financial statements are current and accurate.  Do not fly blind! 

Monthly Management Information should be available, and no more than five days after the month's end.  

Why? because it is silly and risky to wait any longer to find out that you have just lost a material amount of money.  Cash is king!

2/. Customer Profitability Profiling

A fact of life is that some customers simply are not worth having!

Awkward or very demanding customers are a drain on a company’s resources.

If a good reason does not exist to retain the client, then they should be jettisoned.  

Failing companies desperate for sales revenue often hold on to them, resulting in a downward spiral of unprofitability.

The Lesson

Get rid of them now. Shed money-losing customers, do not let them be critical to the survival of the company.

3/. Understanding the Costs

A common problem affecting failing companies is that do not know how to calculate their costs.

They do not realize how important it is to do so.

When a company does not understand the cost involved in producing products/services they cannot quantify what contribution the costs are making to wealth creation. Fundamental is a need to understand which costs are non-contributing and therefore wealth destroying.

The Lesson

Understanding the business’s cost types is critical.

4/. Understanding the Business as an Organisation

Not having an organisational chart with clearly assigned responsibilities is a fault many businesses have.

Where there is no clearly understood chain of command businesses can flounder.  

The Lesson

Companies are unable to perform optimally without a clarity of authority and responsibility.

5/. Failing to control expenses and conserve cash

When looking at the viability of a business, a plan should be created to see how long a company's cash will last and then take whatever steps are necessary to make sure it doesn't run out.

This may involve dismissing staff or stopping unnecessary expenditure.  

A common habit of distressed companies is to spend lavishly on such things as cars; trade show displays; equipment which is not needed, or on advertising that is generating no measurable return.

The Lesson

When a company is on the precipice, liquidity is imperative at all times.  

Review expenses and avoid wasting precious resource.

6/. Business & Management Warning Signs

Financial information is important but management and operational signs of distress should not be ignored when gauging a company’s health.

Examples such as changes in the company’s market environment can trigger the downward spiral in a company’s health. Other examples include increased competition; a downturn in the economy; an unexpected shift in buyers’ habits which can affect a business adversely.

The Lesson

Keep an eye on the wider environment and actively manage changing market trends.

And Finally a note for the Optimists

“I have not failed. I’ve just found 10,000 ways that won’t work.” - Thomas A. Edison

Sam Talby

Partner

 

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