Stay Alert and Recognize Signs that your Business may be in Trouble

By Randall Orser | Budget

As a business owner closing your company can be one of the hardest things you ever have to do.  But especially in these financially difficult times it is important that you recognize the signs of trouble early and prepare to deal with these difficulties early. Here are some red flags that can indicate that it is time to consider your options and what these may be:

1.  Dwindling Cash Flow - a shrinking cash flow is the most important factor that determines if a business is failing.  Financial experts say that having a cash reserve and a 13-14 week projection of future cash flow is critical to the business.  The covid-19 crisis has shown that many businesses did not have savings for a rainy day but were basically living from one payroll and rent payment to the next.  In addition many of the both large and small businesses that have filed for bankruptcy or a Companies Creditors Arrangement Act in the past few months were already financially distressed long before the pandemic started.   Many familiar companies are working with their lenders and advisers and considering restructuring to determine if they can continue to operate as a going concern.  

2.  Leaning on subsidies vs strategy - Do not rely on government subsidies to keep your business open.  There are over 300 different programs available federal, provincial and municipal and all require different guarantees, covenants and future repayment commitments.  Qualifying for subsidies may be just delaying the inevitable instead they should be used to help you to carry on with your business without this extra support.

3  Pressure from Suppliers - When the income flow slows companies are forced to extend their payables and manage their cash flows.  However if your unpaid bills are piling up and your suppliers make you pay COD or cut you off this is a serious sign that your payables have stretched as far as they can go. This may have been the situation for many businesses prior to the pandemic and it may quite likely be the same once the pandemic is over if your cash flow has not increased.

4.  Support from Lenders - If you have a bank loan or secured creditors that have taken assets as collateral you will need to generate enough positive cash flow to keep them happy.  If that is not possible even though your bank has eased restrictions and is offering an interest only loan then it is time to say that you are done.

5. Commitment to using your personal wealth - Many small business owners put their personal wealth on the line to finance their business so if they run into cash flow problems they have to decide how much more of their personal wealth do they want to commit to the business.  Even though entrepreneurs are usually optimistic, in this current climate they need to take a hard look and decide if their business is still viable.  

Even if you are seeing an number of warning signs the solution is not always bankruptcy.  It is a good idea to consult an insolvency professional as soon as financial problems are anticipated.  They will help you to explore all your options before closing the business which could include, finding an acquisition partner, forming a strategic alliance leading to a merger, or filing a holding proposal under the Bankruptcy and Insolvency Act.  In this situation your existing creditors are held in abeyance until you are able to put together a plan to sell your assets, or change your business model to become able to repay your creditors in the future.

From an article by Margaret Craig-Bourdin

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President/CEO Number Crunchers® Accounting Inc. Learn how to just say stuff it to this bookkeeping thing with our 'Just Say: "Stuff It" To Bookkeeping program.