Responding to the early warning signs

Written on the 14th of January 2009 by Matthew Nolan - Good Onya Australia's Business Management Gun

With all the talk of an economic downturn, how do you know if your business really needs to make changes?  The good news is that there are early warning signs to watch out for. These will let you know when it’s time to take immediate action…if you spot them before it’s too late.

The extent to which you’ll need to take action in response to these individual early warning signs is compounded if your business has more than one come to light at once. If your business has multiple early warning signs, it’s undoubtedly time to take immediate corrective action and potentially seek external assistance.

• Falling sales:  If sales are reducing substantially more than seasonal variations and current industry trends indicate they should, it may be an early waring sign that the sales function of your business requires immediate attention to stem the decline before it becomes more significant. You can find comparative data for your industry free from the Australian Bureau of Statistics and many industry groups. 

• Paying bills:  If the amount of unpaid creditors is rapidly increasing because there’s insufficient cash to pay them, it’s time to look into why cash is not coming into the business as fast as it’s being spent, letting you make the necessary adjustments to stem the tide and arrange to pay creditors off over time when needed. 

• Supplier relationships:  If suppliers are cutting off credit to your company because of concerns about the business or slow payments, you could be forced to change to COD trading terms that will significantly impact cashflow. If any supplier makes this request, be sure it’s quickly addressed before word spreads across other suppliers to your business. 

• Demand letters:  Is your business receiving threatening letters and calls from collections agents, banks and solicitors? Don’t ignore them, if not acted upon quickly these can escalate to court action and serious damage to credit ratings which may quickly result in your business being forced to close. 

• Incomplete financial records:  Are you so busy putting out fires in your business that completing financial records, such as monthly accounts, is the last thing on your mind? If so, remember that it’s impossible to manage your company and make the necessary changes if you don’t know vital numbers such as sales, available working capital and creditors. 

• Debtor problems:  Payments from customers are typically slow in a downturn. Whilst this can be expected to a modest degree, if debtors have risen beyond manageable levels and a number are now expected to default on their payment obligations to your business, it’s time to get professional help. A reputable collection agent will assist in collecting the amounts before they cause your business to have a serious cashflow crunch. 

• Turnover:  A downturn adds stress in any business, but if there are sudden resignations amongst directors or management personnel, it’s time to take steps to retain the remaining key members of your team. 

• Dependence on a “big” sale or contract:  Is your business relying on securing that next big sale or contact to survive? If so, this is a potentially dangerous early warning sign, as current market conditions mean many big sales and contracts are being put on hold. This is potentially compounded by competitors that may be willing to undercut prices in order to maintain volumes. 

• Tax and superannuation:  Overdue tax and superannuation payments are a common early sign of financial distress. Whilst the tax office is often used by many businesses to provide an “informal” overdraft, the ATO won’t hesitate to lodge a petition to wind up your business if stretched too far. On the other hand, overdue superannuation payments can quickly find a business in breach of their employee obligations. 

• Additional finance:  If internal sources of capital have been exhausted and additional external finance must be secured to enable your business to continue trading, it highlights a potential problem. Securing additional finance in the current market won’t be as easy as usual, meaning alternate plans may need to be devised that don’t rely on this additional capital being secured.

If acted upon promptly, the above early warning signs can often soon be resolved. But if ignored they can have dire consequences which quickly escalate when multiple early warning signs appear at once. If this happens, don’t be afraid to ask for help from your accountant or trusted business advisor.

Matthew Nolan is the host of SME Money Makers on Sky Business and has over 19 years experience in banking and finance, specialising in providing finance to SMEs.