Almost every business faces bumps in the road or periods of real operational difficulty but how do you know when challenging headwinds have become serious financial problems?
Financial Problems And An Unsteady Balance Sheets
When sales momentum is heading in the wrong direction it is always likely to seem as if a company is struggling to compete. However, there are certain key factors that determine whether a business is in good enough financial shape to come out on the other side of a testing period.
Key to the whole equation is a company’s balance sheet. Cash can disappear quickly in times of trouble but if cash holdings remain largely intact then a business always has a fighting chance of turning its fortunes around.
Interest Payments Are Proving A Heavy Burden
Having debts to pay is not necessarily a bad thing and borrowing money to help prepare a business for a brighter future is very often essential for success. However, when interest payments on debts amount to a very significant portion of a company’s outgoings, it can be a sign of a business entering dangerous financial territory.
Dividends Being Reigned In
A simple but often effective measure of how a company considers its prospects is the rate of dividend paid out to shareholders. When dividends are being consistently reigned in, it can be a sign of underlying financial troubles and concerns about the shape a business is in.
However, reducing or cutting a dividend is not always a sure sign that a company is struggling because there can be other reasons for reigning in the amounts of money paid out to shareholders or relevant parties.
Assets Going On Sale
It doesn’t take too much of a leap of the imagination to guess that when a business is beginning to sell off some of its most valuable assets that the underlying financial picture might not be great.
Raising funds via any means necessary might be a prudent course of action for a business struggling to stay afloat but there is always likely to be a limit to what can be sold without a company damaging its own long-term prospects.
The key point here is to look out for really unusual behavior and for sales that either don’t make much long-term sense or which undermine a company’s ability to operate.
Directors Jumping Ship
When a company’s top managers start setting off for pastures new, it can be a clear sign that all is not as it should be as far as an organisation’s financial health is concerned. So if you see directors taking up new posts with rival companies and less senior employees being promoted with unusual haste then it might be worth looking deeper into what’s really going on.
Perks Becoming Less Perky
Most companies will want to keep their employees happy and offering perks can be an important means of attracting and retaining talented staff. But genuine financial problems and difficulties can only be ignored or brushed aside for so long. Eventually, struggling businesses are often obliged by financial necessity to cut back on the perks they offer their workforce.
When a company decides that it wants to change its auditor on short notice or based upon some sort of disagreement then it might be red flag and a sign of problems. Businesses do change who handles their books in the normal run of things but not often when their finances are ticking along quite nicely and the future is set fair.