When a company faces financial distress or bankruptcy one of the most commonly asked questions that pops up is “Did we see it coming? Could we have done something to prevent it?”. In reality, many times companies can actually read the signs and know if they are taking a highway to financial distress.
Distress signs are easy to spot in any given company. Most investors and company owners can actually read early warning signs that show them their business is experiencing some trouble. It is really important to identify this early signs to be able to react and stay away from a catastrophe such as bankruptcy.
In this article, Suzzanne Uhland will share some of the signs that can help you spot companies that are in distress. If you see that your business is showing some of these red flags, you will be able to quickly react and change the way your company is operating.
Cash Flow and Financial Statements
There is a simple way for you to spot if a company is in financial distress: looking at its financial statements. Usually, a company’s cash flow statements will show you most things you need to know about their financial health.
When the cash flow statements are showing red numbers, it is important to consider for how long they have been this way. If many months have passed and numbers don’t change, this often means that the company is facing financial distress. Also, when a company has some money in the bank and this money is being spent without being replaced, this tends to mean that it is not healthy enough in financial terms and bankruptcy may appear on the horizon.
When a company spends more than what it earns, it may be facing financial distress. This may be a good time for it to do some changes, cut expenses, review its business plan, talk to its employees, customers, suppliers, and investors. Getting financial advice from experts is also a good idea, since it may help the organization staying away from financial troubles.
Having negative cash flow may happen to any company. Even big companies have to face this problem. However, it is important to ask about the causes of financial distress. It is common to see companies that spend lots of cash to grow, but in return are facing payment delays from customers. These delays force businesses to stretch their cash flow and they have to struggle to have enough working capital. Payment delays force many businesses to ask for loans and pay interests at outrageous rates.
Having to operate with negative cash flow due to payment delays is also a sign that may help you spot if a company is in distress. Cash flow statements may be threatened by interest repayment, this may also make it harder for companies to pay for their loans, and they will need to borrow more money to cover up for the one the already owe. When all this happens, by the time companies get paid, money tends to shrink in return, because their expenses are higher than their incomes.
This kind of situation helps individuals spot companies in distress. This may be useful if what you want is to buy one of this companies, merge with it or simply be aware of their current situation and the way they are facing problems related to cash flow, consumers, and the market.
Financial information is only one way to spot companies in distress. Analyzing the way a company is being managed can also help you detect is some red flags need to be raised. Not reacting to a downturn in the economy or responding to the market’s demands are some of the most common things that happen inside companies that can help any individual know if there is something they should worry about. Managers who simply don’t want to show the financial statements of companies should also be distrusted because they are often hiding valuable information.
Also, when companies make a dramatic change in the way they operate and strive in a different direction, this may mean they are facing financial distress. Unusual strategies, unexpected hires or changes in the variety of offered products and services are some of the most common signs that take place when bankruptcy is a possibility.
Another easy way for you to spot companies in distress is by evaluating the quality of their products and services. When there is a visible deterioration in the quality of products and services offered by a company, it usually means the company is facing financial distress and needs to cut back on expenses.
Most of the time, this happens because companies need to save some money and also lower the prices of their products in order to increase the volume of sold goods. When this situation is visible during a sustained period of time and instead of getting better it keeps offering worse products, it means the company is definitely
* Featured Image courtesy of Jeff Ferzoco at Flickr.com