Understanding more about the financial performance of your company will help you see trends as they are developing so you don't wait until a crisis. Some problems are acute—they happen suddenly, and some are chronic—they go on for years and you learn to live with them. Here are seven situations that should put up red flags.
1. Little or no revenue growth.
In the beginning, companies normally experience substantial growth as customers find you and you market enthusiastically. Then, there is a leveling-off period when growth seems to slow and then stop or the economy changes. Flat revenues really mean a loss of revenues in terms of real dollars. Costs to operate your business never go down. Rent, utilities, phone, and even postage always are going up. Wages as well—including your own, and your employees will seek raises or additional benefits. All of this has a cost. Flat revenue will create a serious cash squeeze and imperil your ability to pay debts.
2. Deteriorating capital base.
Periods of flat growth in revenue can cause a negative cash flow. You need a steady stream of profit to allow cash to pay principal debt service. After a fairly short time, you will find yourself in a double bind. You aren't generating enough cash to fund existing operations and this lack of profits may prevent you from borrowing to fund it as well. If you have gotten to this point, chances are your alternatives are few. One may be to look to outside investors for funds, although you may have to give up a good bit of control to get the capital you need. The other possibility is to sell off assets to raise cash. This may be a dangerous strategy, without considerable thought. You don't want to sell something you will need later on. Selling at a loss will affect profits, as well as solvency.
3. Equipment failures that threaten productivity.
Not having positive cash flow will not just jeopardize growth, it also will affect current operations. If your equipment is not operating properly, your production may be slower or quality not what you need or expect. In addition, total breakdowns will stop production and cause employees to stand around not accomplishing work. This will raise your direct costs and lower profits even further.
4. Poor employee morale.
Look around at your employees and give close consideration to what you see. Are they angry, disillusioned, or confused? Are they short of inventory, working on substandard equipment, or always fending off threatening phone calls? Are you communicating with them? Surely you know having good employees is a contributing factor in the growth and success of your venture. So it makes sense that if, and when, they feel negative, this will have the opposite effect. The most immediate result will be diminished productivity. People, who really don't care, show it. They take more time off and seldom think of ways to accomplish the task at hand more quickly or more efficiently. If wages are frozen or bonuses missed, the attitude becomes "What's the use?" In the end, your job becomes tougher because the need to communicate becomes more urgent.
5. Unpaid taxes.
No business owner sets out to get into trouble with the tax collector. Most of us have enough sense to know how painful that can be. But it may start accidentally and grow quickly. It often starts with a single payroll when the money isn't fully available. Paychecks are issued with the expectation that withheld taxes will be covered as soon as customers begin to pay outstanding invoices. But by the time these payments are received, other bills have to be paid or another payroll is coming up. Before you know it, taxes are owed and the money just isn't there. Now you are on dangerous territory. First of all, many taxing bodies have the power to collect that exceeds those of ordinary creditors and they are effective collectors. Second, the financial burden grows very quickly, particularly if unpaid returns are not filed. So, in the end, you won't just be paying the tax, you will be paying back the tax plus penalty and interest. Another consideration is the possibility of personal liability. If you are the responsible officer then the collection actions will be aimed at your assets. This is one problem you can't ignore.
6. Failure to collect.
If payments get slower take some immediate action before it is too late. I had a client who was a small contractor who allowed a major Fortune 100 company to get so far behind that my client had to file bankruptcy. Minimize your exposure. If payments slow down, don't wait until they stop. Get on the phone and call for your money. These are the times when you have to work hard just to stay even.
7. Competition creating pricing pressure.
The graveyards of America are full of contractors who worked too cheap, some of which are still partially in operation wreaking havoc in the industry. You do not want to take part in this foolish movement. Your numbers belong to you and they will tell you what you need to get for the job in order to prosper and survive. The truth is that most contractors do not know their numbers and that is why they are in trouble. Learn your numbers. Staying in business without making a profit makes little sense.
Take action before it is too late
Getting help is most certainly the right thing to do. When a business is in trouble, you need to come to terms with the fact that your existing management style contributed to the problem in some manner. Procrastinating is the wrong thing to do as well as, thinking things will turn around on their own. I've worked with hundreds of contractors who have come to me after they are deep in trouble and been able to turn themselves around with the right knowledge and business model. Had they waited for things to turn around on their own, they would have suffered severe financial pain and loss. Don't wait, start today.
Henry Goudreau is a Sarasota, Fla.-based author of several self-study business development courses and books for contractors. To learn more, visit www.contractorsbusinessexpert.com.