Armanino Blog

6 Warning Signs Your Business Might Be in Trouble

by Michael Hogan
December 06, 2017

All too often, the failure of a business catches management, owners, lenders and investors by surprise. When you're focused on day-to-day operations, problems can develop unnoticed, so your organization could already be in danger by the time you realize something's wrong.

Every business faces challenges. Senior management needs to rely on the fundamentals to understand the organization's overall financial health, and take corrective action early if certain indicators are identified. A failure to do so may limit the company's options, including its ability for a strategic pivot or a controlled sale/exit. Taking immediate and meaningful corrective action preserves optionality and generally improves the outcome for all parties in interest, and retaining a third-party advisor to help can accelerate this process.

The purpose of this post is to provide you with examples of common warning signs and highlight the importance of taking appropriate corrective action as soon as possible. Here are six signs you can look for that indicate your business might be in trouble:

  1. A new round of financing is taking longer than expected.

    When you go into the marketplace to raise money, it's a chance to find out what investors or lenders think about your organization and its prospects. If your latest round of financing is taking longer than previous rounds, that could be a sign that the market sees something it doesn't like.

    Investors might have concerns about your business after going through their due diligence. Or the market might see some external problems that you aren't aware of yet—like new competitors that are about to launch. Even if you're getting positive feedback from investors, you should still be concerned if your funding is taking longer than before. Verbal praise is far from a firm commitment.

  2. Sale of the business is delayed.

    Selling your company is similar to raising financing. Potential buyers are going to look closely at your business to come up with their valuation. If you're having trouble finding an acceptable offer, it could be a sign that your internal valuation is off or there are problems with the fundamentals of your business.

    We often see businesses get in trouble when they continue looking for a perfect offer that may not be out there. By doing so, they risk running out of cash and being forced to settle for an even lower offer.

  3. You're missing major milestones.

    When you're in the middle of running your business and hit delays, it's easy to appreciate why something went wrong. And there very well could be justifiable reasons. But for people on the outside looking in, when a company starts missing milestones, all they see are problems and excuses.

    Management needs to take a broad picture of how the company is doing. If you look over the last two years, where are you now versus your previous forecast for sales, product development, etc.? Are you on schedule, or are you falling further and further behind? For example, maybe you had a product scheduled to launch in a month, and now it won't be released for two quarters. If you're consistently missing milestones, you need to figure out how to get back on schedule, because investors, lenders and buyers are not interested in excuses.

  4. There's turnover in the C-suite.

    In a successful organization, everyone is communicating and on the same page. But when things start going wrong, people stop talking, and key employees might see problems they aren't bringing to your attention.

    If one of your C-suite employees leaves, it could be because they see serious issues for your company's future. For example, maybe your chief science officer is not optimistic about developing your new product, or your chief financial officer doesn't think your balance sheet can be repaired.

    Whenever you lose a high-level person, try to figure out why. Was it natural turnover, or a sign of a more serious problem in the business?

  5. You have significant AP beyond normal terms.

    Your accounts payable (AP) can tell you the state of your cash flow. If it's taking you longer and longer to pay your bills, you're likely facing internal cash flow trouble. You're borrowing from your suppliers to keep afloat because the business is not generating enough cash, and this can't go on forever. You need to act swiftly to fix the problems with your business before the cash is gone.

  6. You have less than six months of runway.

    Companies usually think they have more time than they really do. It's easy to overestimate how long you can keep paying operating expenses and underestimate how long it will take to turn things around.

    Six months of cash runway is roughly the minimum amount you need to keep all your options open. (We find that distressed companies usually think they have six months of cash, when on further inspection, they really only have four months.) Six months gives you enough breathing room to handle delays in raising a new round of financing, closing a major transaction or selling your company. It also gives you enough room to pursue backup plans. Once you sink past six months of cash, you start to run out of time and choices.

Move Quickly

All of these warning signs are symptoms of problems in your organization, not causes. When you see these indicators, you need to figure out what's wrong and address the issue as soon as possible. It could also be time to bring in a third party and get an objective analysis of your situation.

A turnaround specialist can figure out why you're in trouble and help you get back on track as quickly as possible. The earlier you bring in the turnaround team, the more they'll be able to do. By being proactive, you'll have more cash and a wider range of options, such as fixing your operational problems, raising another round of funding, or finding a buyer.

The bottom line? Don't wait until it's too late to reach out for help. By reacting immediately when you see these early warning signs, you'll be much better equipped to turn things around and get your business back on track before it's too late.

Find more helpful insights for financially distressed companies from Armanino's Restructuring team.

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