Understanding more about the financial performance of your company will help you see trends as they are developing and not wait for a crisis.
Some problems are acute — they happen suddenly — and some are chronic — they go on for years and you learn to live with them. Here are seven situations that should put up red flags.
1. Little or no revenue growth
Early-stage companies normally experience substantial growth as customers find you and your market enthusiastically.
Then there is a leveling-off period when growth seems to slow and then stop. It may work to spend a short period at that plateau while you allow your business systems to grow to handle the volume.
But then you must look at ways to get back on the growth path.The reasons not to do so are understandable.
You may be working 50 to 60 hours a week just to handle what you have and there is little time to find new clients, even if you thought you could handle their business.
But growth is a necessity — because even with a reasonable level of inflation, flat revenues really mean a loss of revenues in terms of real rands.
And, as you know, the costs to operate your business never go down. Rent, utilities and telecoms are always going up. And wages too, including your own.
As your employees become more experienced, you will want to pay them commensurate with their contributions, so raises are understandable, in benefits as well as salary.
You may have added insurance and additional leave time. All of this has a cost. And you need to replace and update equipment as well.
So what effect does flat growth have with this scenario? It lowers your profit. Costs become a greater percentage of revenue and ultimately profits become smaller.
It may begin to create a serious cash squeeze and imperil your ability to pay debts and keep up with needed equipment purchases or repair.
2. Deteriorating capital base
Periods of flat growth in revenue can cause a negative cash flow. You need a steady stream of profit to allow cash to pay principal debt service and allow for reinvestment in new technology, equipment, or new project development.
After a fairly short time, you will find yourself in a double bind. You aren’t generating enough cash to fund any meaningful growth and this lack of profits may prevent you from borrowing to fund it as well.
If you have reached this point, chances are your alternatives are few. One may be to look to outside investors for funds, although you may have to give up a good bit of control to get the capital you need.
The other possibility is to sell off assets to raise cash. This may be a dangerous strategy, without considerable thought.
You don’t want to sell something you will need later on. Selling slow-moving inventory at a loss will affect profits as well as solvency.
3. Equipment failures that threaten productivity
Not having positive cash flow will not just jeopardise growth; it will also affect current operations.
If your equipment is not operating properly, your production may be slower, or quality not what you need or expect.
In addition, total breakdowns will stop production and cause employees to stand around not accomplishing any work. This will raise your direct costs and lower profits even further.
4. Poor employee morale
Look around at your employees and give close consideration to what you see.
- Are they angry, disillusioned, or confused?
- Are they short of inventory, working on substandard equipment, or always fending off threatening phone calls?
- Are you communicating with them?
Surely you know that having good employees is a contributing factor in the growth and success of your venture. So it makes sense that when (and if) they feel negative, this will have the opposite effect.
The most immediate result will be diminished productivity. People who don’t care, show it. They take more time off and seldom think of ways to accomplish the task at hand more quickly or more efficiently.
And remember as well, your employees are often the public face of your company. If they have gripes, that’s where they may air them.
5. Unpaid taxes
No business owner sets out to get into trouble with the tax collector. Most of us have enough sense to know how painful that can be. But it may start accidentally and grow quickly.
It often starts with a single payroll when the money isn’t fully available. Paycheques are issued with the expectation that withheld taxes will be covered as soon as customers begin to pay outstanding invoices. But by the time these payments are received, other bills have to be paid or another payroll is coming up.
Before you know it, taxes are owed and the money just isn’t there. Now you’re on dangerous territory.
6. Failure or closing of major customer
Most new businesses are warned about becoming dependent on a single customer or even a few. That’s easy in theory, but often difficult in practice.
When a customer offers you a lot of business, it isn’t easy to turn it down. If you’re in an industry where there are only a few players of any size, this may be your reality.
If it is and one of these major customers cuts back operations, files for reorganisation, or closes, your entire business may be jeopardised. So pay attention to what is happening within the industry as well as with your customers.
If payments get slower, take some action. If the company is big enough, the accounting side does not talk to the purchasing side, so you won’t lose the business.
Anyway, if you’re not going to get paid, you don’t want the sale. I had a client who was a small electrical contractor who allowed a major company to get so far behind that my client had to file for bankruptcy. Minimise your exposure.
If orders slow down, don’t wait until they stop: Get out and look for new business. At the same time, keep your lines of communication up with your customer. These are the times when you have to work hard just to stay even.
7. New technology creating pricing pressure
The years bring new technology: If older companies cannot afford to keep up, they’re likely to be unable to compete.
Labour-intensive businesses must be able to avail themselves of labour-saving devices. Pricing pressures come from those domestic companies that can afford to do so in addition to the offshore operations that use low-cost labour. Staying in business without making a profit makes little sense.
These are not the only serious problems a company can run into. I could write a book about the perils of the dot-com companies, their overuse of venture capital and underuse of business models.
Regardless of how new an idea is and how clever the folks who thought it up, business is now and will always be about revenue exceeding costs and creating profit. This is not a theory; it is a reality and you must have a stream of income.
The latest and greatest idea may come and go, but at the end of the day, it’s hard work and good dealings that secure the future for most businesses.