SOS! Early Warning Signs Your Small Business Is in Trouble

Most of us know a red flag when we see one. Whether or not we acknowledge it is a different story. Remember your college boyfriend? The one who played hacky sack incessantly on the quad? While your friends told you to dump him, you ignored the early warning signs. “But hacky sack is Chad’s passion! He ghosted our first date to practice so he can go pro!”  

Luckily you are older and wiser now and can spot a problem when you see it. Furthermore, you have the wherewithal to address it.    

Approximately 20% of new businesses fail within the first two years. Like Chad and his lavalamp collection, there are a few ways your business can tell you that something is amiss. Keep reading to learn how to spot early signs of financial trouble so you can keep your business afloat.       

How’s your cash flow?  

This might seem as obvious as Chad’s puka-shell necklace but it’s worth saying: if you don’t have actual cash, you can’t run your business. At least, not for long.   

Low or negative cash flow indicates that you don’t have the liquid assets to cover necessary expenses like bills, rent, and payroll. Without those taken care of, consider yourself dead in the water.  

If you are struggling to make ends meet each month despite showing a profit, it’s time to do a little detective work. Consult your balance sheet and cash flow statements. What is eating up all those funds? Are your overheads too high? Did you attempt an ambitious expansion that you can’t quite handle? Or maybe it’s time to revisit those accounts receivable aging reports. Either way, you’ll want to make some changes and fast.  

Do you have a healthy income statement?  

Shh... you hear that? No, it’s not the sound of Chad’s drum circle. That’s the sound of expenses racking up, leaving you with an unflattering bottom line.  

The income statement is where you’ll find out if your business has a net gain or loss. And if you aren’t making enough money to cover your short-term operating expenses, it’s only a matter of time before things snowball alarmingly.   

Turning a profit can be deceiving. It’s important to pay attention to where your revenue is coming from. Your profits should be coming from sales and services. If you find that your revenue is mostly from non-operating income, you may be buying yourself some time but not getting a clear picture of just how well your business is actually performing.   

Spoiler...it might not be doing well.   

Sometimes it’s okay to end up with a net loss. Businesses can go through ups and downs for valid reasons. However, if it becomes a trend, then it’s time to repair broken parts in your system.  

Is your bookkeeping on point?  

Not to show our bias...but this one should be a no-brainer (like Chad’s love of patchouli oil). Nothing drives that final nail into the coffin like poor bookkeeping.   

Take it from us (we’re experts)—disorganized bookkeeping is expensive! It can skew your budget or cause you to pay inaccurate taxes. Hello audit! Financial and legal trouble aside, it makes for a tough relationship with your accountant.  

As a small business owner, you are most likely operating on very thin margins.  If you don’t have methodical, thorough records to pass on to your accountant, then we can’t help you optimize every penny available to you.   

At first, you might be able to keep track of your business accounts on your own. As your business grows, so will the number of opportunities for things to go awry. To quote The Notorious B.I.G., “mo money, mo problems.”   

If you find you’re not keeping tidy books, then it’s time to get some help before it ends up costing you in fines, missed deductions, or total bankruptcy.  

How are your people skills? 

Your employees are the proverbial canaries in the coal mine. If you are hemorrhaging staff and experiencing low morale, chances are there’s something wrong.   

This can sound like an HR problem (if you run a small business...that’s your job too, baby!) but it’s also a financial problem. Consider the cost of recruiting, hiring and training new staff. Are your employees angry about late or missing paychecks? That sounds like a big ol’ cash flow red flag.   

Same goes for a dwindling client base. Consumers are savvy and sense trouble from a mile away. If your business isn’t doing well, it’s only a matter of time before your clientele catches wind. There’s a reason Chad never had a serious girlfriend before you. Without clients, you have no income. If you feel your business is losing its edge, perhaps it’s time to re-engage with your customers or conduct some further market research.   

In need of a lifeboat? 

Opening a small business can come at the cost of blood, sweat, and tears. Make sure you don’t pay those prices in vain. Keeping your finger on the financial pulse of your business, especially early on, is crucial.   

Is your business pulling a Chad and sending you mixed signals? Worried you might join that failed 20%? Need a little business relationship advice? Contact Know Your Numbers today to get expert eyes on any red flags, and advice about how to turn things around.  

What are your tips and tricks for keeping your business financially healthy? Leave them in the comments below.