Small business owners are their own CEO, making strategic decisions about the future of their company. But many also spend so much time running day-to-day operations that they can lose sight of the big picture.
This partial blindness can be a liability when things start to go wrong. Too often, SME-owners are so focused on the details that they miss the warning signs.
Whatever underlying problems a business has, the ultimate reason for a firm going to the wall is invariably the same – insufficient cash-flow. Here are five red flags that indicate that you may be heading towards a cash crisis.
Your turnover is reducing
If your turnover is decreasing, it will adversely affect your business’s profitability, cash-flow and your ability to meet overheads.
You must first establish why your sales are decreasing and then take action. It could be due to several reasons:
Look at the products and services you are offering and establish whether there is still demand for them. If the market has changed due to competition or new technology, then your business model needs to adapt to survive.
Loss of a major client
If you lose a major client or contract, not only will you need to invest time and resources to win new clients, but you may also need to reduce your overheads to prevent losses until turnover recovers.
If you spend all your time dealing with red tape and compliance your turnover will suffer, especially if you are the major work-winner. Business-owners must be able to delegate or outsource these tasks where appropriate.
Your sales are increasing but cash is getting tighter
This could be a sign of overtrading – a danger that is often overlooked as the business appears healthy, but needs to be addressed quickly to avoid business failure.
When a business overtrades, it grows faster than it can sustain. It is important to plan your cash-flow carefully during periods of growth, to ensure you have sufficient finance to pay for the extra work needed to fulfil the extra orders.
Sales revenue does not contribute enough to meet overheads
Your business may be achieving strong sales and your turnover may even be increasing, but if your revenue is insufficient to meet your overheads, you will be trading at a loss and a cash crisis will shortly follow.
It is important to compare your pricing against your direct costs and overheads – to establish what level of sales you must achieve to meet all your outgoings. If your costs increase or your margins fall, the business will need to increase sales to achieve the same level of profitability.
Staff morale is low
One of the signs of a failing business is low staff morale. Employees will be aware a business is not performing and the anxiety created often leads to:
Staff becoming less efficient
Staff taking more days off sick
Staff turnover increasing
In a struggling business, the impact of low morale on productivity and the additional costs of hiring new staff will create further problems.
You spend all your time firefighting
When cash is tight, business-owners can find themselves spending most of their time dealing with creditors, collections and lenders – and unable to take a step back to resolve the underlying problems.
It can be very useful at this point to seek professional advice. An objective third party can help draw up a plan that addresses the key issues and allows the business owner to get back to working on their business rather than in it.
In the current challenging environment, businesses that adapt to their customers’ needs, while keeping down costs and driving sales will survive and thrive. A business-owner should act decisively as soon as warning signs appear to bring their business back to health.
John Buchanan is a business performance consultant at the chartered accountants HW Fisher & Company.