When was the last time you reviewed the financial health of your business?

Taking stock of how things are going on a regular basis can help you identify the early warning signs that your business may be in trouble (it will also help prevent small issues becoming much bigger problems that you may not be able to recover from).

What are the signs that a business may be in trouble?

According to CPA Australia, the four early warning signs that your business may be in trouble are:

  1. poor cash flow
  2. changes in customer behaviour
  3. weakening financial position
  4. not keeping up with compliance obligations

Read on to find out if your business may be showing one of these early warning signs and, more importantly, what you can do to turn things around.

Poor cash flow

There’s a good reason why the phrase ‘cash flow is king’ is so widely used in small business. It’s an often neglected area of business that can provide the best indication of how you are tracking.

Signs that your business has poor cash flow can include:

  • you’re unaware of your cash flow position or have a cash deficit
  • customer payments are late and/or irregular
  • your payments to suppliers are irregular or you are struggling to pay debt
  • your turnover rate is healthy but your profits are low.

How to take the first step

There are a number of things you can do (many at no cost, but they’ll take a little of your time) to help you improve your cash flow management. This includes:

Changes in customer behaviour

If the demand for your products or services is falling, or the quality is suffering due to financial constraints, this can severely impact on your business if left unresolved.

Signs that customer behaviour has changed include:

  • decrease in sales
  • loss of major clients/customers
  • increase in customer complaints or refund requests.

How to take the first step

  • Review your cost of goods sold and pricing to see if it's time to raise your prices.
  • Review your suppliers or explore new options to see if you can get cheaper, new or better products and services supplied to your business.
  • Explore upsell and cross-sell opportunities (rather than discounting products). Read our tips on how to discount without impacting your profit margin to find out more.
  • Look at your marketing and promotional activity. If you aren’t actively marketing your business, digital marketing can be a cost effective way to promote your business to new customers. Read our tips how to get your business online to help you generate sales or refresh your digital marketing approach if this is an area of your business that has been neglected.
  • Seek feedback. If you have lost major clients or customer sales have declined, contact them to find out why they are no longer buying from you.
    • For consumers/retail customers, sending a survey is a quick and effective way of collecting feedback.
    • For larger clients, a phone call or face-to-face meeting can help you explore if it’s possible to re-establish the relationship or find out why they have left.
  • Complete a competitor analysis to see if/how the landscape for your business may have changed.

Weakening financial position

This one is pretty straight forward, without the appropriate finances it’s not a case of if but when your business can no longer continue trading.

Signs of a weakening financial position include:

  • profits and sales are falling
  • outstanding debt that you are unable to meet
  • an overreliance on borrowed funds to operate
  • costs have increased but revenue has not
  • you are no longer drawing a salary from the business.

How to take the first step

  • Seek professional advice early on. Speak to your accountant to discuss strategies that you can implement to improve your finances.
  • Talk to your bank/financial institution’s financial hardship team. Ask them if they can provide any relief/options to help you during this time. The worst thing you can do is stay silent.
  • Review your product and service offering to focus on higher profit margin products and services rather than low margin ones.
  • See if there is any government assistance available for businesses in your industry (either due to COVID-19, government grants or measures announced in the 2020-21 Federal Budget).

Not keeping up with compliance obligations

Like your cash flow, if you aren’t regularly keeping up with your business compliance obligations, it can be hard to fully understand for your financial position.

Signs that you are not keeping up with your compliance obligations include:

  • you aren’t keeping up-to-date records for your business
  • you have fallen behind on your business activity statements (BAS), tax returns or superannuation payments to staff.

Take the first step today

  • Speak to the Australian Taxation Office’s small business support unit. If the ATO is aware of your situation, they may be able to help defer a lodgement or payment, set up a payment plan or fast track your tax return.
  • Take the time to catch up on your record keeping. You can do this yourself or seek the services of a bookkeeper.
  • Access free support from the financial counselling services available to small business owners in WA.

Other factors to consider

Other key actions to take when your business is displaying the early warning signs of trouble include:

  • don’t delay taking action – the longer you wait the harder it will be to recover
  • maintain good communication with stakeholders - the worst thing you can do is go silent
  • make sure you are taking care of yourself, including your mental health – there are a number of support services specifically set up to provide support to small business owners.

More information and resources to help you

Legal and risk
05 September 2023