The fourth industrial revolution brought along a sheer array of corporate threats. Alongside hackers and Internet criminals, who found in the fast-growing Internet realm the perfect substrate to nurture their felonies, today’s corporate and business juncture is full of traps, most of them capable of forcing a company to file for bankruptcy. Suzzanne Uhland has mentioned before what companies should know before actually filing for “chapter 11”; moreover, it has been proven to be true, that bankruptcy is to some extent foreseeable since financial distress per se begins years before actual bankruptcy.
Companies embark themselves on a spiral towards business failure, typical of many public organizations, which has become rather common under today’s framework: heavy losses and insufficient working capital are the result of poor decisions, most of which are made long before business fiasco. Soon after companies file for bankruptcy, an analysis of their financial figures depicts that financial frustrations began at some point where they could have been foreseen, should they had paid attention to the red flags: operating margin, working capital, costs, revenue, cash flow, etc., are basic indicator that ought to be assessed in order to prevent such pejorative scenarios —it is not a secret that if those are below the company’s expectations, there is definitely something going wrong—. Another sign manager should pay special attention to are liquidity ratios: when properly assessed, these can provide major signs of foreseeable trouble as well.
Although a company’s corporate behavior is subject to the juncture, the extent to which managers and those responsible for evaluating whether the company is performing well or not, pay attention to outer factors becomes crucial when trying to prevent companies from failing: stock prices, for example, become a vital red flag, since shareholders hold a vantage point regarding the future of a company. Financial advisors, as well as employees and managers, hold the responsibility of keeping an eye on the company’s investments, and, furthermore, come up with a plan in advance should these fail. Companies that keep losing money quarter after quarter eventually run out cash. This is to some extent controllable if a basic analysis using the company’s balance sheet to compare the cash figures against what they were during the previous financial period were carried out. A common mistake that has become rather popular is for companies to keep issuing stocks and debt.
Income statements are often used to determine whether a company is capable of keeping up with its interest payments, especially after reporting its sales. Since most companies (every company, actually) are founded under the sole purpose of generating revenue, the ideal scenario would depict a cushion; in the ideal scenario companies end up having more cash at the end of the day, however, one of the most common red flags shows that, if a company is bound to fail, such cushions fades away gradually, and the company end up struggling to make enough to comply with their main obligations.
Besides, companies that get rid of their dividend payments to shareholder are not, by definition, embarking themselves towards bankruptcy. Nonetheless, it has proven to be true that, when companies face harsh times, dividends are commonly one of the first things to fade away. This could be interpreted in two ways: either the company is, in reality, struggling to earn enough money, or not. In order for shareholders or financial advisors to determine whether such payment cut is necessarily depicting a pejorative and tough time for a company, it is important to also consider other factors that could point out that the latter is true: profitability indicators and rates and negative cash flows often provide additional insights on the issue.
Humans created companies, and humans make mistakes, therefore, following the simple syllogism, companies also fail. Nevertheless, these fail because of poor top management decisions: although this is not the best example, a company heading directly for failure is like a sinking ship: rodents always leave first, which is why top managers conveniently find other jobs just before it is too late —which ultimately becomes a crucial red flag that could point out that there is trouble ahead. And just as if it that was not bad enough, companies bound to file for bankruptcy try to save the up to the last penny (literally): companies often sell their assets to raise some money once they face difficulty. Companies that sell even their headquarters, their assets, their most sophisticated pieces of equipment in order for them to raise cash, are definitely calling for attention.
And last but not least, just before the ship sinks, companies try to save money by cutting additional costs. Normally before the water starts to flood the vessel (following the analogy), it is not rare for companies to start cutting costs related to their health benefits and pension plans, amongst others. Should anything of the above happens, better watch out!