The ability to recognize, acknowledge and react quickly to warning signs that your business is in trouble could mean the difference between keeping your company's doors open or closing them. The South Carolina Association of CPAs urges small business owners to be alert to the following danger signs.
Lost Market Share and Declining Sales
In today's competitive market, customers don't hesitate to search out the best products and services, even if that means severing long-term business relationships. You should regard a loss in market share as a clear message from your customers that a problem exists. Look within your company for declines in product quality and/or customer service. Look outside your company to determine what competitors may be doing to pull market share away.
A seasonal drop in sales can be common for certain kinds of businesses, but a steady downward curve for two or three quarters in a row typically indicates trouble. Set realistic sales goals and time frames for your firm. Then outline the specific steps you need to take to achieve those goals. Maybe you should reexamine your product line and/or pricing model. Perhaps it's time to design a new marketing strategy or expand geographically. What you don't want to do is ignore this warning.Sustained Cash Flow Problems
If there is one area of vulnerability many growing companies share, it's cash flow problems. An occasional crunch may not be a sign of an unhealthy business, but left unchecked, persistent cash flow difficulties can mean trouble. What can you do? In terms of accounts receivable, be selective about granting credit. Bill promptly and follow up when receivables pass the 45-day mark. Your strategy for accounts payable should focus on timing payments so they are received on or just before the due date. To improve cash flow, keep inventories low and take advantage of volume discounts only if you can use the entire amount purchased.
Too Much Business Tied Up in One Customer
While most experts recommend that companies derive no more than a third of their business from one customer, it's easy to fall into the one-client trap. Devote some time each week to marketing. If you're too busy, consider hiring a marketing consultant, even part time, who can help you diversify your client list. It's critical that you prepare for the possibility that, one day, your cash cow may dry up.
Poor Financial Recordkeeping
Critical records are important because it's difficult to manage what you can't measure. When a business is in trouble, financial paperwork often gets put off until the last minute or is forgotten altogether. This can get you into trouble with lenders, the Internal Revenue Service and other government agencies. Set aside a few hours each week to catch up on paperwork and consult regularly with your CPA to make certain that your company's legal and financial paperwork is in order.
Unwarranted Increases in Expenses
Increased expenses sometimes indicate a lack of spending controls. Compare expenses against prior months and against the same period last year. Be sure that there is an approval process in place for expenses over a predetermined amount, and don't hesitate to periodically question expenses, especially those that don't support the production of income. When workers know their expenses are being reviewed, they tend to become much more careful about how they spend the company's money. Another expense-cutting strategy calls for getting quotes from two or three vendors before purchasing supplies, inventory and services.
Don't Wait Until it's Too Late
One of the biggest mistakes business owners make is to look the other way and hope things will get better. If your business is showing any of these warning signs you need to identify solutions and implement corrective actions in a timely way. A CPA can help your business get back on the right track.
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