1. Too much debt
If a company’s operations are mostly funded by creditors instead of the business owners, and it may have some difficulty servicing that debt, then it is under stress and may not be a valuable business partner.
2. Overexpansion
Overexpansion can quickly lead to cash flow troubles, even for experienced operators. This then leaves them running the risk of taking on large amounts of debt in a bid to keep the business going.
3. Lack of clarity
Clarity around what the business is trying to achieve is critical to its ongoing success. If it’s not clear what the business does or how it generates cash, there is likely to be a significant amount of risk.
4. Qualified accounts / going concern commentary
Qualified accounts are audited accounts where the auditor has doubts or disagreements with the firm’s management.
Going concern commentary is not as serious as qualified accounts but it can be a sign that the auditor is protecting themselves from litigation but is still signing off on the accounts.
This is a huge red flag; don’t do business with a company showing these warning signs.
5. Profit warnings
Profit warnings are most commonly the domain of listed companies.
6. Profit versus cash flow
It is important to differentiate profits from cash flow, as current profitability is not an accurate measure for determining the ongoing viability of a business.
Strong profits but little cash flow could indicate problems lurking behind the scenes, and can even be “a sign of dodgy accounting practices”.
7. Irregular payments
Another common indication a business is in strife is its payments become irregular – even if they make sizeable lump-sum payments at ad hoc intervals.
It’s a sign the company’s cash flow is compromised. Deciding to continue doing business with a company in this situation can depend on past payment history, current relationships, and the reasonable likelihood of the business getting its cash flow back on track.
8. Unstable leadership
Aside from finances, instability among a business’ management team and senior employees can indicate problems. Beware of a significant turnover among senior member of staff and management.
9. Trappings of success
When directors have high-end, brand-new cars, computer systems, and furnishings, it can be a sign that directors are rewarding themselves at the expense of the company.
10. Late filing of accounts
It pays to dig into a company’s history of lodging documentation.
If the company files its accounts late, it could be a sign of general disorganisation or it could indicate that the business had trouble getting an auditor to sign off.
If your company identifies with any of these items on the list, do not fret, contact us and we can help you develop ways to improve.
No comments:
Post a Comment