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9 Clues that a Business is in Financial Trouble

9 Clues that a Business is in Financial Trouble

Aug 28, 2020 | By Isaac O'Bannon | 0 Comments

Topics: Small Business, Business Management, Featured, Financial Trouble

With much of the nation still suffering the effects of partial shutdowns, economic uncertainty, and lower consumer spending, businesses are facing a number of challenges. But even in normal times, public accountants must stay vigilant when serving small businesses, particularly those in seasonal or trend-focused industries.

As trusted advisors with access to much of a business’ underlying financial data, accountants are uniquely positioned to know when an entity is experiencing financial hiccups that could worsen if left undiagnosed and untreated. By keeping on top of issues that affect cash flow, payroll, and taxation, accountants can help these small businesses keep ahead of potential pitfalls. Here are several issues than foretell financial issues for a business:

1. Cash Flow Issues

Most businesses will experience cash flow issues at some point, especially early on. This can be more severe when they allow their accounts receivable to get out of control with too many aging accounts. When the “occasional” cash flow crunch becomes more routine, however, there are more serious issues underlying the problem. For example:

  • Accounts Receivable
  • Diminishing sales
  • Too low a profit margin
  • Too high a debt load
  • Employee theft
  • Unproductive staffing

These issues can have a serious negative impact on business stability.

2. Tax Trouble

In the U.S., most businesses are subject to a variety of taxes, including federal and state income taxes, excise taxes, payroll taxes, sales taxes, and more local tax obligations. Some, such as income, payroll and sales, are often paid in monthly or quarterly payments. Businesses that get behind on any of these tax debts will quickly also face additional penalties, fees and even potential criminal investigation. Businesses with international connections may also be responsible for VAT or other taxes in the nations in which they do business.

3. Customer Issues

When the finances of a business start to falter, managers may start cutting corners on service or product quality and quantity. This can impact customer satisfaction, which can also impact future sales, ongoing customer relationships, or delays in payment of invoices. It’s easy to see how these possible outcomes can further aggravate any financial difficulties. Decreasing customer satisfaction can also be reflected in the morale of the business’ workers, causing a negative snowball effect on service.

4. Outdated Equipment

Many businesses use physical equipment or other assets to produce or provide their service or product to their customers.

For retailers, this can include:

  • The building and furnishings
  • Tables
  • Point-of-sale devices
  • Decorations

Plus many other amenities that impact a customer’s experience. It can also include regular cleanings by contractors, an issue top of mind in the COVID-age.

Other businesses, such as service contractors or construction businesses, may have a fleet of vehicles or other equipment that also requires routine service to remain reliable and productive. If a business starts skipping routine maintenance to save a few dollars, it can diminish the customer experience or productivity, which will have corresponding effects on income.

5. Sloppy Books

Accurate bookkeeping is more than just documenting a business’ previous transactions for historical and tax purposes. A proper set of financials is also used to decide on future issues such as spending and growth. Improperly kept books lead, inevitably, to poor business decisions, and can be easily used to hide theft, fraud or general poor management. Even thefts in small amounts can add up over time, or lead the perpetrator to try for larger amounts. Many small businesses fail because of theft.

6. Bounced Checks

When a business’ checks start bouncing, fees add up and the recipient of those checks loses confidence in the business. And one or two overdraft fees can further compound the issue, leading to many more. When vendors or contractors start losing confidence in whether they will be paid for their product or work, they may start requiring payment in advance, which can hamper cash flow. These vendors may also end up charging higher costs or fees for their products or services or terminate their business relationship. Poor payment histories will also negatively impact the business’ credit score and access to lending.

7. Invisible Owners

When customers are complaining or vendors start using collections tactics to receive late payments, unreliable or overwhelmed owners may stick their heads in the sand, or start avoiding the office/business location. Persistent financial issues can be stressful and heartbreaking for a business owner, but ignoring them leads to additional problems, including the potential for late bills or missed tax payments. This can also further deteriorate the morale of the staff, and trust of customers and vendors.

8. Payroll Problems

When a business fails to pay their employees, or payroll payments bounce, the business may be at the end. When staff aren’t paid for their work, and then face their own financial uncertainties with bills, rent, car payments and other issues, they will get angry and share it on social media (hurting business reputation) and won’t show up for future shifts. This may as well be employer theft from the employee since they are taking their labor or services without compensation. Furthering this failure, if the business doesn’t pay the payroll taxes and withholding of employees, the business will be deep in not only financial trouble but also legal trouble.

9. Legal Problems

When a business has dug itself into a deep financial hole, it may face lawsuits and collection actions. This can be as minor as collectors calling the business frequently or can escalate to vendors or even employees suing the business for failure to pay. Business lenders may also seek to repossess vehicles or other capital equipment. Business owners can even face criminal penalties for nonpayment of payroll taxes and withholding.

Conclusion

Most businesses face periodic cash flow issues, and with the COVID-19 pandemic, many are feeling it even more. Ethical and responsible businesses will maintain proper financial practices even in the worst of times, which can help them more accurately assess the strengths and weaknesses of their business. Hiding from debt and responsibilities, or lying to staff or oneself, will only compound the negative financial issues and deteriorate the trust of workers and business partners. Instead, find ways to actually address the issues. A public accountant can help the business identify and find solutions to the problems.

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The Author

Isaac O'Bannon

Isaac M. O’Bannon is the managing editor of CPA Practice Advisor and has been advising accounting and technology firms for 20 years.

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