One of the leading causes of small business failure is financial distress.
Occasionally, businesses are unable to meet their financial obligations such as paying employees, suppliers etc.
But when it becomes a frequent occurrence, then such business suffers from financial distress.
This is usually caused by economic downturns (due to external factors like the COVID-19 pandemic or government policy), high costs, poor financial management, loss of revenue etc.
Unfortunately, business owners fail to realize that their businesses are in trouble until it’s too late.
In this article, we would share five (5) signs of financial distress to watch for in your small business.
5 Signs of Financial Distress in Small Businesses
1. Negative Cashflow
It is common to see small businesses that have negative cash flows.
Typically, it’s not something to worry about, as it happens to most businesses. But it becomes cause to worry when it occurs consistently over time.
When your business consistently spends more than it receives, it means that it has less cash to meet its obligations.
This could be caused by several reasons, but the best thing to do here is to attempt to reverse the trend by identifying the cause and implementing solutions such as cutting excessive spending, curbing high outstanding receivables, etc.
2. Dwindling Profits
It’s always a bad sign when your business’s profit declines.
Dwindling profits either say that your costs are too low or that your prices are too low.
Either way, your business needs to take action, and the earlier, the better.
3. Payment Delays & Defaults
When your businesses start delaying payment due to employees, lenders and suppliers for months and months, it is a clear sign that the business is in trouble.
The best way to avoid this situation is to be financially vigilant and stay up to date on the burn rate of the business ahead of time.
Otherwise, the business may have to raise money externally, which comes at extra costs.
4. Declining Sales
When the sales of a business declines, for whatever reason, it means that the business revenue is affected and by extension its ability to meet up with its agreements.
Businesses need to prepare for such scenarios by setting up emergency funds, diversifying their source of income, etc.
5. High-Interest Loans
Banks and other lenders charge interest on loans by assessing the financial viability of your business.
So when a lender charges you an interest rate higher than its usual rate, instead of rushing off to another lender, check the health of your business.
It might just be in financial distress.
Although this list is not exhaustive, and the signs might differ per business, what is important is that small businesses form the habit of monitoring their finances to detect impending problems before they become too fatal.