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Financial Difficulty
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Financial Difficulty

 

Business owners and managers often don't recognize that their business is in financial difficulty. Global and local competition, government legislation, technological change, and other factors contribute to the uncertainty of business environment. Identifying early warning signs of problems can go a long way to proactively dealing with issues before they get out of hand. 

 

The financial decline of a business usually occurs in stages and often are heralded by warning signs.

 

 

Early Warning Signs

 

  1. Slow sales or declining sales.

  2. Low profits.

  3. Operating expenses increasing.

  4. Accounts Receivable or Inventory levels increasing without corresponding increase in revenues.

  5. Accounts Receivable aging which is increasing before collection.

  6. Accounts Payable increasing without corresponding increase in expenses.

  7. Accounts Payable aging which is increasing before payment.

  8. Poor financial indicators such as debt to equity ratio's, working capital ratio's, cash flows, gross margins.

  9. Late payments of government remittances in payroll deductions, GST, tax instalments.

  10. Borrowing funds to pay current expenses.

  11. Financing capital expenditures with working capital.

  12. Incomplete, untimely, erroneous or non-existent management reports such as financial statements, accounts receivable reports, etc.

  13. Lack of management budgeting, forecasting, or business planning. Click HERE for more on Business Planning.

  14. Inability to obtain new financing.

  15. Significant overhead costs.

  16. Competitive environment.

  17. Highly regulated environment.

  18. Saturated or shrinking markets.

  19. Aggressive competitors.

  20. New government regulations.

  21. Personal problems of senior management (gambling, depression, etc.)

  22. Shareholder disputes.

  23. Departure of key employees.

  24. Loss of key clients.

  25. Old and stale product lines.

  26. Aging management team.

  27. Life-style of management/owners that exceed the ability of the business to fund it.

  28. Management greed and ego preventing good business decisions.

  29. Nepotism.

  30. Poor labour relations.

  31. Inventory levels which are too high compared to sales.

  32. Lack of liquidity. There is not enough cash to pay the bills as they come due.

  33. Low working capital. Generally current assets should exceed current liabilities in healthy businesses.

  34. Management requests to lenders to skip some payments.

  35. High employee turnover.

  36. High pressure from suppliers for payment.

  37. Banking lines of credit are maxed out.

  38. Suppliers demanding Cash On Delivery (COD).

  39. Refinancing of assets and sales of assets to maintain cash flow.

 

 

Late Warning Signs

 

  1. Operating losses for several years in a row.

  2. Failure for timely reporting and remittances to the government for payroll remittances, GST, and income tax instalments.

  3. Numerous suppliers demanding COD.

  4. Lenders demanding additional security or new guarantees to maintain existing financing.

  5. Negative cash flow.

  6. Creditor legal action.

  7. Third party demands by government.

  8. Inability to replace staff.

  9. Demands by lenders for immediate repayment of debt.

 

 

Corporations in financial difficulty often leave certain debts unpaid. Directors of these corporations are personally responsible for some of these debts. Click HERE for more.

 

If your business is in the early stages of financial difficulty, immediate action is required. A Chartered Professional Accountant can assist you in improving your financial position. Contact Keith Anderson, BCom, CPA, CA-IT, CITP at (780) 447-5830 if you need advice. 

 

 

 

 

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Keith Anderson, BCom, CPA, CA-IT, CITP Copyright September 9, 1999 Last Modified :09/10/15 10:21 AM