Debt denial: How to spot the signs your corporation may need help

In today’s volatile economic climate, corporate businesses across Canada are facing ongoing challenges – from interest rate pressures and inflation to shifting consumer behaviours and competitive disruption. 

While many corporations are quick to adapt their strategies in time to regain control, others unknowingly slip into financial distress by reacting instead of proactively planning. Often, the earliest signs of trouble are subtle and easily dismissed, especially when leadership is focused on growth or recovery. 

Debt denial is a common but dangerous mindset that can prevent businesses from acknowledging and addressing underlying financial issues. Whether it’s missed payments, declining margins, or operational inefficiencies, these red flags can accumulate in the background until they grow to threaten the entire operation.

Financial warning signs

Early signs of financial distress often appear in cash flow, credit relationships, and banking activity. Recognizing these red flags can help leaders take corrective action before deeper issues arise.

1. Cash flow issues
   • Mounting supplier arrears
   • Missed lease payments
   • Overdue CRA remittances (HST/GST/Payroll)
   • Injecting personal funds to meet regular operating costs
   • Build-up of accounts receivable or an inability to collect on large accounts
2. Declining revenue or profits
   • Increasing costs or decreasing revenues reducing profit margins
3. Increased debt
   • Seeking new or alternative financing, factoring receivables, high-cost short-term loans
   • At or near operating credit line limit
4. Financial reporting
   • Financial statements and bookkeeping not on time
   • Not using the data from financial reports to make decisions, or an inability to rely on the accuracy of the reports
5. “Special Loans”
   • Operating lender has moved the business to the “Special Loans” division to determine if the bank is willing to continue their relationship wit the company or discontinue and demand immediate repayment.
   • If a business is moved to the “Special Loans” division, it’s critical to seek professional advice immediately.

Operational warning signs

Operational inefficiencies and unreliable financial reporting can obscure the true health of a business. These issues not only hinder decision making but may also signal broader structural problems.

1. Loss of key customers or suppliers
   • This is especially significant for small businesses with one or a few customers for whom losing them may be catastrophic and will require quick action to eliminate expenses or find new revenue.
2. Excess inventory build-up
   • Leads to increased cost is inventory isn’t turning over in time with industry norms
   • Suggests poor forecasting and declining demand
   • Results in higher costs and reduced margins
3. Employee turnover and morale issues
   • Loss of key employees, financial controller/CFO, department managers, or team leaders
   • Unmotivated employees and excessive sick days or time off
   • Difficulty attracting new employees
4. Fraud or theft
   • Businesses who have been the victim of fraud or theft already must improve control systems or risk further financial and reputational damage
5. Legal and/or regulatory issues
   • Supplier or customer lawsuits
   • Issues with industry regulators or government officials
   • Distracted by managing legal or compliance issues resulting in a decreased ability to manage ongoing operations

Market and strategy warning signs

External market forces and internal strategic missteps can erode profitability and increase reliance on short-term debt. Identifying these pressures is key to maintaining long-term financial stability.

1. Loss of market share
   • Unaware of where the business stands in relation to the overall market in which it operates
   • Introduction of new competitors with innovative approaches or aggressive pricing
   • Not monitoring revenues on an ongoing basis through the lens of how the business is performing compared to others.
2. Ambiguous focus or strategy
   • Frequent changes in goals or services without a clear plan
   • Diverting funds or other resources to new ventures on an impromptu basis
3. Industry or economic downturn
   • Rising interest rates, recessions, declining consumer confidence can all result in decreased demand and sales

The value of accurate and timely reporting

For corporate businesses, maintaining accurate and timely financial reporting isn’t just a best practice, it’s a strategic necessity. Reliable financial data ensures leaderships has what they need to make informed decisions, respond to emerging risks appropriately, and maintain stakeholder confidence.

This is where key performance indicators (KPIs) come in. From daily sales to cash flow margins and liquidity ratios, understanding and being able to action vital data from your business, and link all of it to your accounting systems, is imperative.

Automating data collection from operational areas such as sales, inventory, and expenses, can increase efficiency and provide real-time performance data to allow management to detect irregularities and respond to concerning trends proactively. This level of integration not only improves internal oversight but also strengthens external reporting and compliance.

When to engage a professional

While all the above-mentioned red flags are a good indication that your business needs help, there are a few key warning signs that should be taken very seriously:

• Company’s banking relationships has moved to the “Special Loans” division
• No ability to meet debt obligations
• Persistent negative cash flows
• Loss of profitability despite attempt to correct
• CRA has threatened to take legal action to collect outstanding remittances
• Company has been subject to a lawsuit with the potential to cause significant financial damage
• An event such as fraud, a natural disaster, loss of key personnel, significant changes in industry, has occurred and is causing significant financial harm or material impact on operations.

MNP’s experienced team of advisors are well-versed in the nuances of corporate debt and can help you assess your options to find the best solution for your unique situation.

Reach out to your local advisor today to learn more.