5 Signs Your Business Is Financially Unhealthy
As a business owner, your business’s financial health is of the greatest importance. There is more to measuring the financial health of your business, however than simply looking at how much money is in your bank. In fact, there are many tell-tale signs that indicate your business is financially unhealthy. Recognising them can make all the difference in ensuring your business survives. Let’s take a look at 5 signs of poor financial health in small businesses.
INABILITY TO PAY YOUR DEBTS
An inability to pay your debts in full and on time is often the first sign that your business is experiencing financial difficulty. If you are trading in a company this can lead to trading insolvently. Some ways to handle this are to:
Prioritise your debt. Begin by identifying what you can afford to pay now, what you can pay later and when to go on a payment plan.
Contact late or non-paying customers. If you're having problems getting the money they owe you, there are options
Speak to your creditors early and explain the situation. Ask to go on a payment plan or to extend the due date.
POOR PROFITABILITY
If your profit is reducing, your business could be on a slow downward spiral. Your profits help drive your business to success so it’s important to monitor your profit, identify issues regularly, and consider areas such as:
gross and net margins: check your stock prices and on costs and review expenses regularly to ensure that you are passing on any increases to your customers if possible
sales: do you have measures in place to retain and attract new customers and are they working?
if you’re offering discounts, your profit will be impacted — look for alternative ways to offer extras to your customers, such as after-sales services or discounts for volume-based sales
CONTINUALLY REPLACING STAFF
Are your employees dropping like flies? If so, poor retention could be a sign that your business is headed for failure. Reports state that it can cost as much as 33% of an employee’s annual salary in hiring their replacement.
While every business is going to have employee turnover (it’s just a part of business!), if you find your business faced with high turnover rates you could be wasting valuable resources spending time and money on training new staff.
Think about ways to reduce staff turnover, such as:
having a recruitment plan in place that outlines the attributes your staff need to meet, such as any qualifications, flexibility on working hours, being a team player — invest some of your extra time at this point to ensure you employ the right staff for your business so there is less turnover
providing great support and training to your staff and hiring internal before going external
involving staff in managing the business – you'll get more commitment when your staff have a say
making sure the culture within your business provides the types of rewards your staff is looking for, and create a great working environment that incentivises your employees to want to stick around
YOU’RE NOT TAKING A SALARY
If you’re struggling to pay your employees and you have not taken a salary from the business for a few months, it could be a sign your business is failing. Sure, there may be a week or two where you choose to not take out a salary for cashflow reasons, but if it’s ongoing it’s a very clear sign that your business is struggling financially.
INADEQUATE FINANCIAL RECORDS
Financial records are the backbone of your business so it’s critical to keep them up-to-date and monitor them regularly; make sure all your invoices and bills are entered weekly into your financial system of choice and review your profit and loss statement monthly.
You should also prepare a cash flow forecast at least monthly to monitor the cash position of your business, identify what payments need to be made, and where the money is coming from. You’ll also be able to identify possible cash flow shortages ahead of time – and take action to rectify them before it’s too late!
HOW CAN YOU GET YOUR BUSINESS BACK ON TRACK?
If any of the above is sounding familiar, follow these suggestions to help make running the financial side of your business easier, and get your business back on track:
Make sure you have a good filing system in place that makes it easy to find invoices, bank statements, and all of the information you need to keep your financial records up-to-date (have them all in the same place, like in your Xero file).
Set aside time each week to update your financial records and review them.
Work with an accountant (like us!) who can identify key financial areas that should be reviewed regularly, and provide you with steps to get your finances back on track before it’s too late. You can book a free consultation with us.