Warning Signs Your Company May be in Trouble

2015-03-16   minute read

Alternatives to Bankruptcy


Many individuals who run small- to medium-sized businesses, do so either as proprietors or corporations. We often see individuals who have started a company, taken steps to incorporate and then run into financial road blocks. Individuals getting into business can be very good at their trade, have a good work ethic and referral network, but lack the skills or the support to manage the business. A good book keeper and financial advisor can help and should be consulted when you are starting out, to prevent problems in the future.

Financing a business comes in many forms. It is important to have an adequate operating credit to ensure the business is able to meet its monthly payable obligations while waiting for receivables to come in from clients. Keeping current monthly records and maintaining a follow-up strategy to ensure your clients are paying you on a timely basis will allow you as a business owner to recognise any financial trouble your company may be facing early on. There are many indicators that show a business may be in financial trouble. Listed below are the top 10 signs we, as restructuring professionals, look for when considering options that may allow a company to turn their financial situation around and return to being a profitable business.

Top 10 signs a Business is in Trouble:

  1. Lack of profitability, which can be identified by recurring monthly losses, declining gross profit and/or declining sales. 
  2. Loss of key customers which may be due to increased competition in your market or pricing of jobs. A strategy may be needed to replace these clients. 
  3. Cash flow problems may result from receivables aging up to 90 days, suppliers demanding COD payments or short repayment terms, which can result in exceeding operating credit limits. 
  4. Government liability creditors, including delayed payments to Canada Revenue Agency for payroll remittances and GST; PST or Workman’s compensation. The delay of these payments can be very costly in penalties and interest and could also result in a personal liability for the directors if not paid by the company. 
  5. Loss of key employees will have a detrimental effect on operations. Ensuring staff is properly managed and morale is kept up is an important role for a business owner. 
  6. Owner or manager distractions due to personal emotional issues or a new business venture takes the focus away from the primary business, which in turn affects profitably. 
  7. Mismanagement of assets through deferred maintenance, depletion of inventories and sale of income producing assets in an effort to improve cash flow. 
  8. Lack of management tools, such as current financial information and an up-to-date business plan, budget or cash flow projection. 
  9. If there is a lack of adequate insurance, major litigation by a customer may not be covered and the costs of legal fees can cause a drain on the company’s working capital.
  10. Actions and litigation by creditors. These actions can include a landlord distraint for rent arrears, judgements being registered by creditors and threat of seizure of assets either by judgement creditors or secured creditors. Significant assessments by Revenue Canada can result in seizure of the company bank account which will effectively render the company unable to operate.

If your business is experiencing some or all of these symptoms, it is time to get professional advice. Talk to your bank and determine what options may be available to increase operating credits or term out loans to allow for better cash flow. When approaching your bank, be sure you have a recovery strategy to present to them in order to gain their confidence that your business is still viable and can be turned around. You are the best person to sell your business but a bank will still want to see a financial plan along with your enthusiasm for your business.

You may need to consider a formal restructuring of the debt to allow the company the time to recover and return to profitability. MNP has the professionals to assist you as you work to regain control and return to being competitive and profitable.