Financial problems rarely happen overnight. Early detection increases the chances of a successful turnaround. Here are four red flags to watch out for:
- Late financial statements. When financials are delayed, it could be a sign of management apathy, incompetence or denial. The CFO or controller may be hoping to turn things around in the interim.
- Mounting payables. Distressed businesses often fall behind on payments to suppliers and stretch out credit terms. Eventually, late payments may strain supplier relations and cause shortages. So, it’s imperative to catch and remedy payables problems as early as possible.
- High employee turnover. Employees are the first to know when a company isn’t meeting its goals. Late paychecks, idle machines and stressful work environments may entice workers — especially top performers — to seek greener pastures. As employees leave, morale and productivity often worsen.
- Cash flow problems. If a company reports a trend of negative (or erratic) cash flows from operations, it usually signals problems. Some troubled businesses try to stay afloat by selling off assets or by taking on excessive amounts of debt.
On the flip side, sometimes a company is in relatively good financial health, but its customers aren’t. And this can be a big problem if a key customer represents a substantial percentage of the business’s revenue. Be on the lookout for customers that are showing these signs of financial distress. If necessary, take steps to protect yourself from late or unpaid invoices — or from loss of future revenue in the event that a key customer goes out of business.
