In this article, we’ll describe what the primary signs are and how you can recover from them.
Is Your Business Headed Towards Financial Troubles? These Are The Top Signs:
1. Increased Pressure From Credit Sources
When you use a credit card for business expenses, credit sources will expect to be paid on-time. The sooner they receive the money, the less risky they'll view you as a borrower. Plus, less risk means they'll extend credit to your business in the future.
However, if you make late payments
, credit providers will consider you a riskier borrower, and will put more pressure on your business to repay them.
In addition, if you take out a secured loan, this gives lenders a stake in the business. The lenders will take action if they feel the risk levels of borrowers have crossed a threshold. They could liquidate the business and go after the personal assets of the business owner.
If you're receiving pressure from your creditors, this may suggest that your business is struggling.
2. A Lack of Balance in Cash Flow
It's often said that cash is king
, and that's no different with businesses. When a company lacks cash flow for its working capital cycles
, it may run into trouble with costs associated with the cycles.
In a perfect business scenario, your customers pay as soon as you deliver your products. Then, you could then use that money for the next business cycle and use it to expand your business. However, it's unlikely that your business will always be able to achieve this.
Small business owners often extend payment terms to attract and keep customers. Some customers will demand unreasonable credit terms and may get them due to the clout they have. For instance, when a company such as Home Depot insists on payment terms of 90 days, few suppliers will deny this request.
Generous payment terms can put a strain on businesses due to the cash flow shortage created. This strain has even caused businesses to fold, so it should be taken seriously.
3. Issues with Human Capital and Staffing
It’s smart for business owners to keep costs down in their business plan. However, staffing is an area where many businesses struggle, because quality workers are essential to your business's success. Due to this, paying employees what they deserve is an investment.
Sometimes, business owners will try to cut costs on salaries, and this may work in the short term. However, when you find top-notch people, they'll find higher salaries elsewhere. Therefore, they'll quit, leaving your business in a bind.
Another mistake that many business owners make is trying to do everything themselves. In doing so, they believe they'll save money by not paying for hiring and payroll costs. However, they may not be qualified to handle certain business tasks, especially when the business starts to grow.
When businesses hire people, some owners micro-manage the staff. As Steve Jobs once said
, “It doesn't make sense to hire smart people and tell them what to do; we hire smart people so they can tell us what to do.”
If you're running into staffing issues, this may be a sign of financial problems ahead. To combat this, invest in your employees in the long term.
4. Consistent Loan Refinancing
Typically, if you repeatedly refinance loans, it will eventually catch up with you. It can work for a little while, but the debt usually piles up, and you can’t manage it. Lenders will also take notice.
If your debt grows, the credit profile of your business will change. Therefore, it'll be more difficult and expensive to refinance or borrow money in the future.
When interest rates drop, refinancing may make sense. Using refinancing as a line of credit, however, will cause problems that could make it difficult to run your business responsibly.
5. When Your Customers Take Notice
Are you late with your shipments? Perhaps you didn’t have the cash flow to make the latest production cycle. Or, you may be short-staffed. Regardless of the reasons, customers will take notice when service declines.
Once you've lost customers, it’s hard to win them back. Even worse, customers may tell their friends about what happened, or post about it on social media
. Hopefully, when you work to improve areas of your business, you'll lessen customer satisfaction. Of course, you won't be able to make everyone happy, but seeing the same complaints should be cause for concern.
6. A Poor Work Atmosphere
Usually, a poor work environment will cause employees to leave your company. When your employees dread coming to work, they won’t be productive
and likely won’t put in extra effort into their roles. Instead, they'll use the job as a stepping stone, leaving once a better opportunity arises.
If your work environment includes unsafe working conditions, your business will be even more at risk. This can cause employees undue stress, and they may contact state authorities as a result. If the state inspects your business, they could fine you if they find that you aren't complying with safety laws.
What Can You Do To Recover?
Don’t give up
! The good news is that the mistakes mentioned can be corrected. When you take action, your business has a great chance of recovering from the struggles detailed in this post.
As a business owner, try to look past the bottom line as the only measure of success. Instead, consider factors that contributed to the bottom line and create an environment to enhance those factors.
Start with human capital. If you were considering a company, would you choose one that potential employees are flocking to or one that they are avoiding? The obvious answer is most candidates will gravitate towards companies that treat employees well. When you improve your company culture, you'll attract quality candidates
Next, learn how to manage small business finances more responsibly. To do this, you can create cash flow projections
to help you better understand your working capital needs. You should also use past histories of customer payments and to take note of ongoing trends.
Lastly, keep tabs on your customers and what they think of your business. Try to set alerts for any late shipments and contact the customers immediately to fix the problem. Customers will notice and appreciate the proactive approach.
At Fora Financial, we provide business financing to entrepreneurs nationwide. Get a free quote today to get started.