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Disclaimer

This is not advice. Items herein are general comments only and do not constitute or convey advice per se. The information contained in these articles is for guidance only and should not be relied upon without obtaining professional advice having regard to your direct circumstances.

 

Recognising the signs of trouble

Businesses with effective account and credit control systems are more likely to detect a deterioration in their business operations than those without such feedback loops.

When a business goes out of business it’s easy to look back with the benefit of hindsight and see where things began to go wrong. It’s not so easy when you’re in the throes of your day-to-day work to see the warning signs that, if ignored, could send a death knell for your business.

However these warning signs do exist and they can be identified if you know what to look for. The good news is that if you’re on the lookout for problems, you stand a good chance of being able to do something to fix them in time to get your business back on track to success.

One key warning sign of things going pear-shaped is in the area of your business financials. In many cases businesses in trouble simple don’t have the financial data available that tells management that there are problems. Reports are delayed or the finances are in such array that reports can’t be created accurately in a timely manner.

While it’s tempting to think of “book work” as being behind the scenes and not the “real work” of the business, often times getting the book work up-to-date will give you the tools to identify and isolate problem areas. For example, a cashflow report might alert you to problems in meeting your day-to-day obligations such as creditors, wages and taxes. A creditor report will tell you if, in addition to financing your business’ debts, you’re carrying your creditors’ debts too.

Other reports let you benchmark your business against others in your industry. These reports give you comparisons so you can see how your business stacks up in key areas and so you can identify where you’re carrying more debt, where your margins are lower or where your business is over- or undercapitalised in comparison with similar businesses.

While opportunities to grow your business might sound heaven sent, business growth can be a double-edged sword. While it’s something to be embraced, it needs to be well managed to be successful. Properly constructed budgets and variance reports used to plan and manage the growth opportunities will help you identify if you’re becoming overextended on borrowings to fund additional plant and equipment, particularly in times of high interest rates.

They will also show you if cash is being continually injected into the business in the form of fresh capital or loans to fund the cost of the growth beyond the business’ ability to service these loans from income that the growth generates.

If your business’ financials are sending out warning signs, the way to see them is to get the finances up to date and to analyse what they’re telling you. The news isn’t all bad and, while we all hope our businesses won’t experience financial difficulties, many successful businesses do encounter periods of financial difficulty. The challenge for management is to recognise there is a problem and to take steps to resolve it before the problem becomes so severe that it cannot be solved. Many businesses, for example, are using debtor financing to convert outstanding receivables into cash needed to meet day-to-day expenses.

Some other signs warning of trouble afoot are triggered by changes to an industry. We live in a world that is constantly changing – new technologies, changes in consumer behaviour and global markets can have an impact on your business. Simply doing business today in the same way as you’ve always done it is no longer a good management technique. Keep alert to warnings that changes are happening in your industry so you can pre-empt problems and take actions to address them before they become insurmountable.

Knowing what the warning signs are and being on the alert for them is a key first step towards steering your business successfully into the future.

Rob Lamers
My Business, November 2008

 


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