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Business-related signs that might suggest failure may be on the horizon

Name: MHA
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Michael J M Reid · Posted on: February 26th 2025 · read

There are many aspects of a business that may lead to potential failure... and they are not always people related.

If one or two negative signs appear, it does not necessarily mean that failure is inevitable but provides an indication that corrective action would be welcome, likely to improve business performance, and place matters on a more secure financial footing.

A number of fairly regular tell-tale signs help an adviser determine business performance:

1. Effective cost control

All costs should be reviewed regularly with each item having to be justified and consideration given about whether there is a more cost-effective way of achieving the same result. This includes an effective credit control and cash utilisation programme which must be understood and followed. The old adage that ‘cash is king’ has never become unfashionable and no-one should feel embarrassed about asking for payment in accordance with their terms of supply.

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Restructuring & Recovery

Equally, when looking at a company’s cashflow, general business practice suggests that current cash is not used to purchase a fixed asset that will produce income over a 10/15 year period, i.e., it is better to match the borrowing cost with the income derived from the asset rather than denude the business of cash which might be used elsewhere more effectively.

2. Customer/supplier contractual problems

Many business owners often shy away from dealing with difficult issues in the hope that they will somehow resolve themselves. Experience suggests that minor hurdles can rapidly become major ones if they are not tackled in a responsible and decisive manner.

3. Government legislation

No business operates in a vacuum and where there are changes in Government legislation that either cause an immediate impact or a long-term reduction in business opportunity, there is little point in trying to continue with the same business model. Review matters and realign the business as appropriate.

4. Lack of timely and understandable management information

Many small businesses tend to operate with one eye on the bank account and assume that everything else will fall into place because of day-to-day involvement.

Advisory

Restructuring & Recovery

"Every successful business will have timely and meaningful financial information, presented in a format that managers understand, with key performance indicators and other important data showing current performance and future expectations. This will inevitably mean that a budget is prepared for a one year/three year period ahead so that proper planning can take place to utilise the financial resources available."

Michael J M Reid, Partner

5. Overtrading

This occurs where a business borrows ever-increasing amounts to finance sales then finds it difficult to continue because customers are slow to pay or decline to pay for whatever reason.

It is accepted that no business likes to tell a customer that a sale transaction cannot be accepted, but if that sale is not funded effectively or has a sufficient gross profit, it could spell disaster. Equally, if a customer has not paid for several months, why would you continue to supply without being confident that there is a genuine prospect of being paid on time.

Competition and market pressure Every business must be aware of what competitors are doing, whether there are any unique selling points that can be promoted to benefit the business, and to react when the market changes, e.g., due to customer preference arising from fashion changes, IT developments etc. You can’t be perfect all the time: don’t be afraid to make changes.
Insufficient investment in the business Many business owners see money in the bank and consider that it can be withdrawn for personal use, forgetting that every business needs to invest in its people, products and equipment. Without regular upgrading of everything connected with the business it is difficult to stay ahead of the field and withstand the inevitable challenges that will arise.
Poor quality attitude A business that lacks a positive attitude to its suppliers, customers and staff is unlikely to prosper because all stakeholder groups will see a lack of general interest and positive focus.
Diversification into non-core areas Many companies make money in their sector and feel that they can produce a similar result elsewhere, often finding that the business lacks the expertise, resources and contacts to survive, thereby creating losses which has a detrimental effect on the successful part of the business.

Conclusion

Clearly, not all these signs mean that failure is inevitable but if they exist, in whole or in part, it is advisable to seek advice and take steps to place the business on a more positive trajectory.