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5 Clear Signs Your Business Is in Financial Distress

SV Partners recently released the key findings of their Commercial Outlook Report, which revealed the top industries at risk of facing financial distress in the next 12 months. Among the top five are the following industries:

  • Construction
  • Accommodation and Food Services
  • Retail Trade
  • Professional, Scientific and Technical Services
  • Manufacturing

The Report also highlighted the top regions throughout Queensland, Victoria, and New South Wales where companies are most at risk. These include:

  • Melbourne Inner
  • Sydney – City and Inner South
  • Parramatta
  • Gold Coast
  • NSW – Inner South West

Regions and Industries in Australia at Risk of Financial Failure

If your business belongs to any of these industries and regions, you need to take a long, hard look at your financials now and fix the weak points before it’s too late!

Signs of Financial Distress

Financial problems in business don’t just happen in a flash. More often than not, they are caused by small, seemingly innocuous lapses that were overlooked until they festered and became too big to ignore.

To avoid situations like this, you must learn to see signs of financial distress as soon as they appear and take corrective action immediately. Here are some of the most common red flags you must watch out for:

1. Disorganised financial reports

Amid the frenzy of day-to-day business operations, organising invoices, receipts, and other such paperwork might not seem like a top priority. But the truth is that these records are crucial to the long-term survival of your company. Financial reports allow you to keep track of your sales and expenditures so you can make better business decisions.

If you don’t remember the last time you updated your financial statements or they are so disorganised that you can’t make sense of them, then you have trouble in your hands.

2. Stagnant or decreasing sales

A healthy business is one that grows, and a sure sign of this is a steady increase of sales over a certain period of time. However, if you’re not selling as many products or signing on as many clients as you used to, that’s a red flag.

Stagnant or decreasing sales indicates that consumers are no longer interested in what you have to offer. When this happens, you must think of ways to innovate and revive consumer acceptance. Otherwise, your business might not survive.

3. Decreasing profit margins

Profit margins measure how well a company is able to manage and balance its earnings with its expenses. They also indicate how profitable a business will be as it grows over time. It’s a huge red flag if you are not putting enough time and effort into understanding your company’s margin performance.

4. Slow-paying clients

Another sign that your business might be in financial distress is if you have an increasing pile of overdue or unpaid invoices. When several clients get behind on paying their debts, your company’s cash flow is sure to be affected. Eventually, you will not have enough funds to settle your own liabilities.

To avoid this issue, you need to set up an efficient process for following up on overdue invoices and stick to this procedure. If you still have clients who fail to pay, don’t hesitate to forward the accounts to a debt collection agency. These professionals are trained and experienced in recovering even the most challenging of debts.

5. Covering shortfalls by borrowing more money

If your business is constantly borrowing money from banks or asking investors for additional capital, that’s a sign that you have a bigger underlying problem. When a company struggles to sustain itself, merely injecting more funds is not the solution—especially not if you plan to do it by acquiring more loans.

You need to re-evaluate every aspect of your operations to find out what’s really going on and to determine if continuing your venture is still a viable option for the long term.

What You Need to Do

If you see any of these signs of financial distress in your company, be sure to seek professional advice as soon as possible. This way, you can minimise your losses and significantly improve your company’s chances for recovery.

Liam White began working at Slater Byrne Recoveries in early 2013. He has worked across the credit & dispute resolution industry for a number of years. He is currently working in a Marketing/Head of Sales capacity at Slater Byrne Recoveries.