10 signs that may indicate a failing business

Posted on August 22, 2014 by Jeremy Frost

As licensed Insolvency Practitioners, we at Frost Group meet with the Directors of many companies who are unfortunately unable to avoid formal insolvency procedures.

Many of those could have avoided failing if the obvious signs had been spotted earlier.

1. The accounts

A balance sheet showing the company has no value, and a profit and loss account displaying losses are good indicators of problems, although bear in mind that the information may be shown or accounted for inaccurately.  Where there is more than one trading entity within a group, the true position can be hidden.  Figures may also be shown in the wrong part of the balance sheet to show a better position.

2. Bad communications

A lack of accounts may also suggest a failing business.  A company that has its accounts produced only once a year for the taxman is trading for many months blind to its financial position.  Figures are ignored at the business’s peril.

3. Creditor funding

Many businesses survive on credit.  Trade suppliers, the bank, employees and the taxman can all end up subsidising the business.  Writs, final demands, cash on delivery agreements and the late payment of staff wages are all indicators of a failing business.

4. Analysis

A high turnover of staff suggests stress and unhappiness in the company, and a lack of essentials, such as office cleaning, soap and toilet rolls, can be signs of problems.

5. Lack of organisation

A lack of delegation may signify serious problems as the director may be taking on all of the functions, not trusting anyone else with the facts.

6. Accounts department in chaos

Are people from the accounts department never available, disorganised or bad-tempered?  Such behaviour is symptomatic of a badly performing business.  The lack of an in-house accountant, book- keeper, or credit controller, or if all this work is done by one over-worked director, can again show major problems.

7. Fabrication or fraud

A struggling business may resort to raising invoices prematurely or even when there is no work to back them up, double-counting figures to improve statistics or promising a non-existent show-stopping order.  Another problem is when spurious invoices are raised to increase turnover and payments from a factoring company.

8. Family funding

Directors trying to stem losses may borrow on their houses or fund business expenses on their credit cards.  If the correct advice is provided, family and friends could successfully save a business but, in many cases, no such due diligence is carried out.

9. Thrown off the scent

We’ve all heard of that one new wonder product that will save the day.  New income innovations are fine as long as they are sound, have the right resource put into them and don’t risk losing the core product.

10. Finally, the threat

Struggling businesses may threaten to take their business elsewhere.  Once the bank and suppliers have been driven away, it will probably be very difficult for the business to obtain new credit.  Therefore, if someone makes this threat, it may well be time to say goodbye.

Conclusion

Many businesses will show one or more of the above problems.  This doesn’t necessarily mean they’re failing, but if you spot a number of the problems in the same business, then this is a good indication of trouble.  If it is your business, seek advice immediately.