Sometimes, entrepreneurs get so wrapped up in trying to grow their business they miss some obvious signs that it may be in financial trouble. Here are a few red flags that might give you pause to think and possibly seek help from a restructuring professional:
Good People are Leaving
Your best employees are your best employees for a reason: they are deeply attuned to your business and will have a clear idea of what is going well and what is not. In almost every case where a business is struggling, the organization’s best employees will be the first to know. They will notice issues procuring items from suppliers. They will experience declining sales. They will feel the tightening of purse strings around the office.
So, if you see your best salesperson, parts associate or receptionist leaving you for the competition, it may be time to take a closer look at your numbers.
You Don’t Know Your Key Performance Indicators
Every business has key performance indicators (KPIs): three or four numbers that drive everything. Some will be sales related, but not necessarily reflected in dollars. Some examples include covers in a restaurant, occupancy percentage in a hotel and service appointments at a car dealership. Other KPIs will relate to costs such as employee wages, cost of key manufacturing components or marketing expenses.
If you know and measure the key performance indicators in your business, you will know how healthy your business is. These numbers help you predict your monthly profits long before the accountants tell you what they are. If you don’t know your KPI’s then it’s easy for things to drift out of control.
Your Trading Ratio is Outside the Zone
To calculate your trading ratio, divide your sales by your working capital (current assets, less current liabilities). This will provide a high-level overview of how your business is performing. If you turn everything over each month – accounts receivable, accounts payable and inventory – you would have a trading ratio of 12; though few businesses are so efficient.
Sales Are Declining
Finally, the most obvious sign your business is (or may soon be) in trouble: your sales are dropping. If you know your business inside and out, you will know what your sales figures daily, monthly, quarterly and annually. You will know what seasonal variations to expect, who your high value customers are and when new customers have been acquired. If you notice your sales dropping, you need to take action immediately. Your sales trump everything. Regardless of how much cash you have in the bank or the performance of any of the above metrics – if sales are declining, something needs to change.
Know When to Ask for Help
The fastest growing businesses are often the ones that run into trouble – usually because they become overextended and run out of liquidity. But there are solutions to these problems. Remember, it’s always much easier to shrink a business than to grow one. The earlier you contact your local Licensed Insolvency Trustee, the more options you will have and the better your chances are for a favourable outcome.
Based out of Regina, Ian Schofield is a Licensed Insolvency Trustee specializing in corporate recovery and Senior Vice President at MNP LTD. To learn more about how MNP Debt can help, contact our local office at 905.937.0002 or toll-free at 310.DEBT (310.3328).
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