Header 5 Warning Signs

Category: Insight | Date: 31/03/2022

7 warning signs your business might be at risk

With all the uncertainty in the world, effects of the disrupted supply chain and the rising trend of high-profile business failures, many businesses will be feeling under pressure now more than ever. Some may even be concerned about how these circumstance will impact the survival of their suppliers or B2B customers too. Our expert Rob has approved the following checklist to help you keep an eye on things.

What are the key warning signs and indicators to identify if a business is at risk? What can you do to protect the business and avoid insolvency or administration? Well, you can look out for these key warning signs and indicators to identify potential difficulties:

Profit Management – Look for notably poor profits in relation to the ultimate strength of your company's balance sheet. If profits are good but current liabilities are high, then this measure will be depressed and can lead to systematic vulnerabilities.

Constrained Liquidity – When, cash going out is higher than cash coming in. This can be scaled by the level of expenditure of the company but ultimately this ratio suggests there are underlying issues.

Stock & Debtors – If there’s insufficient support for the working capital from the long-term funding of the business, this can be a warning sign. Are your debtors and/or stocks too high, or is there simply not enough long-term funds?

Current Asset Cover – Are the business’s liabilities too high, or is there insufficient cover from its current assets to meet those liabilities? This is a central sign to a business in deterioration.

Equity Base – Is the capital base of this company proportionate for the level of trading or is it too low? If it’s too low, then this is another red flag for the business.

Current Funding – This is a very important measure, as a weak rate implies that the company has placed too much dependence on its creditors, receipts in advance or short-term borrowing for funding the tangible assets of the business. Which could lead to cash flow exertions especially when unforeseen internal/external events occur.

Debt Dependency – Is there too much dependence on debt? The key here is to place greater emphasis on short term debt than long term as a company unduly exposed to short-term liabilities are more vulnerable to a decline in profitability or a drop in sales.

The variables highlighted above denote key factors to consider and these invariably lend support to what is a rather uncertain environment, to ensure you are remaining prudent in this volatile times. These wide-ranging signals are particularly complimentary with each other as they examine a series of prevalent metrics conveying the direction on critical areas to observe and the potential challenges applicable.

Whilst these are often utilised in the analysis blueprint for risk management these steps could provide you with data or trends to help recognise opportunities for growth too. Once augmented, this data and information will begin to present a range of optics to highlight the trends, identify the risks and forecast the future - perfect for any business person.

Find out how we can help you by offering more of our expert advice here.