5 FINANCIAL ALARM BELLS TO WATCH FOR
Cashflow or lack of cash is a major sign that your business might not be as healthy as it ought to be.
However it’s not the only indicator. As we near the end of the year, it’s time to take stock of how healthy your business really is. For soletrader and partnerships, you would have completed your tax return for the income tax deadline and also have a set of year end accounts. For businesses who are under a limited company structure, your corporation tax return will be due at a different time of year depending on your financial year end date.
One advantage of end of the tax year submissions is that you get an overview of how well you are doing in your business. Cashflow is one of those performance indicators that is very obvious – you either have cash or you don’t; you have it projected or you don’t. However, here are five other indicators that will help you assess how healthy your business is. If something is not right and alarm bells are sounding, talk to your accountant and see how you can make things right.
1. You are not making profit
Many SMEs rely on end of year statements to tell them whether or not they are making a profit or loss. While I do advocate quarterly or bi-annual accounts, the truth comes
down to knowing whether or not you are making a profit or loss. A quarterly set of accounts helps you realise this more quickly and be knowledgeable on your financials. If you are not making profit, then you are either breaking even or making a loss. While some losses can be explained typically at setup stage with nothing to worry about, if you are not making a profit in the longer term, then there is a concern. You are ultimately in business to make a profit, so take a look at your financials and your bottom line which is key in steering
your business forward.
2. Your sales are decreasing.
Your rate of growth is decreasing. Another indicator of your business health is the level of sales development and turnover. If sales growth is slowing or not developing sufficiently, then that is a concern. Expenses need
to be covered so sales need to be made. If sales are declining, chances are that your expenses may not be, so you could end up in a situation of lack of cashflow or not making a profit. In the case of seasonal businesses where there are busy and quiet periods, it would also help to anticipate turnover such that you can assess working capital and cashflow effectively during seasonal periods. While some SMEs experience 10-20% or even higher growth, year over year, perhaps particularly in the earlier years, it is common for a fall-off. But do take a look at that rate of growth on a daily, weekly and monthly basis versus the previous years for comparisons. You can also look at comparing your sales growth to benchmarks in your industry and to your
own budgets and targets. If it is stagnating, then it’s time to reassess.
3. Your employee turnover is high
Employee turnover is different for every industry sector. Hospitality is quite high at 33% on average while professional services could be 25%. However, if your employee turnover is higher this year than last year, then it’s something to consider. Lack of morale, non existent company culture matters to employees. Studies have shown that it’s rarely additional money that motivates people to leave. Take a look at your employee turnover and assess how healthy it is. This directly links to your customer service, business operations and
performance.
4. Your debtor days are growing
This was very obvious during the recession when the time from invoice to payment was typically high and above your credit terms. Things are improving so this is one area that I suggest you assess. It could be down to an admin task or something more serious. Take time to assess this. It is crucial to keep your debtor days under control so that you have regular cash in and that your sales invoices are being paid in a timely manner.
5. Your bank manager is not your friend
While it may sound simple, if you are not on friendly terms with your bank manager, then an alarm bell should sound. Every business needs a little help at times. The first place should be with your bank and your bank manager. Make a point of getting to meet him or her. We have just recently launched Clarity, our online complete bookkeeping and accounting service that helps SMEs keep control of their finances and provides key info on your profit and loss and financial position. So if you would like to talk to us about this or anything in this article, please feel free to contact us.