Without the proper accounting and budgeting practices it can be difficult to ascertain whether you’re company is truly running at a loss (not making any profit at all) or operating a potentially profitable business that is simply experiencing temporary financial difficulties. Fortunately though, you don’t have to be a proficient accountant in order to recognise the key warning signs that your company could be, or may soon be, operating at a loss:
1. Declining Profits and Net Worth for More than 4 Consecutive Quarters
If your books indicate a declining profit for a period of more than 4 consecutive fiscal quarters then you could be well on the way to running at a loss, if you aren’t already. Likewise, if your net worth is in a deficit, or based on earning trends it is scheduled to fall into a deficit within the next 2-3 years, you might already be operating in a state of insolvency. If you haven’t been keeping thorough track of your expenditure and income now is definitely the time to start, especially if you’re already concerned that the business could be failing.
2. Debts that Exceed the Value of Assets
Debt recovery professionals sometimes use a metric known as the current ratio, also known as the cash ratio, which represents the total amount owed in debts and liabilities versus the value of all cash assets (i.e. bank account funds, pending invoices payments, available cash flow, etc.). In short, if the amount you owe in debts and liabilities exceeds the total value of your assets then your chances of being able to get out of debt without significant restructuring are slim.
3. Declining Monthly Budget Cushion
The margin between how much income the business generates and how much it pays to service its debt each month is commonly referred to as the “cushion.” Failing companies tend to lose this cushion gradually as the business makes less profit and/or debts continue to pile up along with interest charges. If you’re noticing that the company does not have a lot of room for error each month this could be a sign that you’re right around the corner from operating at a loss on a monthly basis, and you could find out at the end of the year that you’ve already been running at a loss on an annual basis.
Experts recommend allowing a margin of error of no more than 20% in your monthly budget. If you find that you’re regularly exceeding your budget in operating expenses, or are unable to meet payroll expenses, your company could be experiencing the early signs of trouble.
4. Engaging in Creditor Negotiations
If you’re finding the need to negotiate with creditors in order to keep them from taking your company to Court, chances are you’re very close to being declared insolvent, unless some type of outside financing can be obtained. When informal negotiations prove to be unsuccessful you may want to consider proposing a formal company voluntary arrangement (CVA) with the assistance of an insolvency practitioner.
A CVA offers a higher rate of approval than informal negotiations conducted independently over the phone or email because it is proposed by a licensed insolvency practitioner, and creditors tend to trust the opinions and proposals of a qualified IP more than a proposal made by the debtor directly.
5. Business Is Stagnant
When a company is failing to land any new contracts, solicit new clients, capitalise on investment opportunities, or progress in any way it is considered stagnant. Now, this is not necessarily a bad thing if you remain stagnant at a satisfactory income level. However, when you’re already having trouble paying bills on time and in full, stagnant operations can lead to the expeditious downfall of your company after the loss of just one or a few key clients.
If stagnancy is a real concern you’ll need to consider some cost-effective restructuring and marketing methods to get things moving again.
Conclusion
Keep in mind that there are many more signs that could indicate your company is in trouble, but for the simplicity’s sake the warning signs above are the primary ones to look for. If you’re dealing with any of the aforementioned issues you should take action urgently if you want to retain any hope of facilitating a recovery.
