Warning signals often ignored by management

Warning signals often ignored by management

Most business failures give ample warning of impending financial doom. A business on the road to failure exhibits signs well in advance of its actual demise. These signs are not foolproof but they indicate something is wrong.

· Overtrading

· Margin erosion

· The big project

· High gearing

· Corporate changes to the business

· Problem borrowing

· Decline in service standards

· Under-capitalization

· Too much easy money

· History of continuing losses

· Financial Ratios

· Lack of cash flow forecasting

· Lack of financial information

· Creative Accounting

·

External

Economic growth

Reducing credit availability

Industry going through hard times

Investors reducing their stakes in the industry (falling share prices

and P/E ratios)

More competitors

Price cutting by competitors

New and cheaper products entering the market (new technology)

Industry adversely affected by new legislation

Internal

Shortage of cash

Increase in accounts payable. Some suppliers insisting on COD

Increase in accountants receivable

ROAM decreasing

No sales growth

Increase in employees absenteeism and staff turnover

Increase in customer complaints re quality, deliveries etc.

Losing customers

Continuously running out of stock (overstocked in some items but

under stocked in others)

Monthly management reports late/unreliable

Increasing expenses

Increased borrowings