Businesses generally don’t fail overnight. There are warning signs that a business is struggling long before the situation becomes critical. If you can spot these signs early enough, you’ll be able to take steps to mitigate – and hopefully reverse – the decline. Ignoring these signs may lead to passing the point of no return.
Here are five warning signs that your business could be in decline.
1. Keep an eye on overall activity
It can take time for a slump in sales to manifest itself in the accounts and cash flow. And ongoing business from existing customers may hide the decline in new sales. So it’s important to keep an eye out for a general decline in business activity month over month. Your sales team might have fewer appointments than usual, for example. Or, you might notice that the phone doesn’t ring as often as it used to.
2. Are you experiencing higher employee turnover?
A sharp increase in employee turnover could be a sign that something isn’t right. It could be a general lack of morale or dissatisfaction with pay that is causing the problem. Or it could be a management style issue. Aside from the usual suspects, it could also be a sign that employees have seen something that you have missed. If employees see the writing on the wall, they won’t hang around until the bitter end, and instead will start looking for new jobs straight away.
3. Are you taking longer to pay suppliers than you used to?
It’s not unusual to need to pay suppliers late once in a while. However, it’s a bad sign if this has become normal practice, and if you start to receive final notices and demands for payments, that is a big red flag. You will spot the trend earlier if you keep a watchful eye on your accounts payable “average days to pay” ratio.
4. Watch out for negative cash flow
A steady increase in your use of credit facilities is a sign that you have a cash flow problem. Using more credit means that the business is being supported by finance rather than by equity and sales revenues. The amount of finance that you are using may fluctuate from one month to the next, and a gradual increase in the use of an overdraft facility may not get noticed at first. Even so, an increasing reliance on credit indicates that there is an underlying problem with the business.
5. Keep an eye on sales trends
Another trend that needs tracking over time is the business turnover. One month of lower than usual sales is no reason to panic. If there is a steady downward trend over several months, though, it is cause for concern.
It’s very easy for an owner to look at their accounts and business through rose-tinted glasses. No one wants to learn that their business is in trouble, and it can be a hard fact to accept. Don’t ignore worrying trends or convince yourself that things will get better next month. Take action now and you will be in better control of the overall business.