Financial Warning Signs

[Rob]

The UK's Institute of Chartered Accountants in England and Wales (ICAEW) has come up with a list of some of the warning signs to look out for during these troubled times. Here they are ...

• When the numbers don’t add up: if you are constantly pushing against your overdraft limit or you have no funds in the bank to pay suppliers and staff.

• When you’re on a slippery slope: if you are gradually falling further behind with payments to your creditors, routinely pay on final demand or only once legal proceedings have started.

• When you can’t face the creditors: if you have started to do all you can to avoid taking phone calls because you know it might be from somebody you owe money.

• When your gut-feeling tells you something is wrong: you are the person who knows your business best – if you feel something isn’t right, you are probably right; if you don’t feel like going to work, aren’t making money, feel there is increasing pressure or don’t enjoy it anymore.

Interesting list. Do you have any to add? Perhaps from first hand experience??

[Dr.Jose Sebastian]

Hi, Rob,

One can add many many signs.
1. When the stutory payments(like provident fund of employees, social security etc, taxes to government) are paid late or with penalty.

2. When one maintains many bank accounts and credit cards and try all kinds of manipulations.

3. When one borrows from the informal credit market at exhorbitant rates of interests.

4. When one tries to sell at longer credit periods items which were being sold for ready cash.

regards
Jose Sebastian

[PaulSimister]

It seems to me that we need two lists:

1 - warning signs to the business owners and managers that things are not going right

2 - warning signs to third parties like customers and suppliers that a particular business is in trouble.

Owners have a duty to themselves to know what is happening in their business as well as a legal obligation for UK companies to manage their businesses properly. I assume similar laws apply elsewhere but directors can be made personally liable for company debts in the UK if their behaviour has not been up to standard.

For third parties it is more difficult but if you are selling to a company, it is likely that you are providing trade credit. Often it is a lot of money and you have very little to go on and usually unsecured.

Banks don't act like this - they insist on information (business plans, accounts, explanations) and security (personal guarantees, charges on business or personal assets) and they have the added advantage of being able to watch the trend on the bank account to see if the hard core element is increasing.

But the credit problem is not just if you are selling to a dodgy business. You can have just as many problems if you buy from a supplier and they become an important ingredient in your success, perhaps providing a unique component.

[EleanorB]

Sadly, even a warning sign might not be much use if they already owe you money but when it comes to new business, warning signs are incredibly important and credit checking certainly has it's place. But if you get bad signs for a company that owes you a large amount of money - what are your options?

Personally, I always think you should at least ask for instalments if they can't pay the full amount due (but get post dated cheques so that you don't have to chase them every month). You may think about taking legal action to get yourself to the top of the debtor pile but that might be what triggers them going into administration so that you get hardly any money whereas if you had given them more leeway you may ultimately get paid in full. Business owners should always consider asking for a director guarantee in these circumstances so that you can after the individual should the company fail.

It's a very tough call to make and each situation should be judged on it's own merits. If you want advice on a particular problem debtor and the merits of your case, please contact me!

[Rob]

Checking on financial warning signs is of course not just a one off task. If you are regularly giving large amounts of credit (in relation to your business size that is) you should think about doing a periodic credit search.

There is a cost but it could be worth it if it alerts you to a looming problem.

Here's an interesting FAQ from Experian about business credit reports (http://www.experian.com/business/credit_report_faq.html).

[Julia]

Financial Warnings are designed to make sure that such a actual earnings shortfall never undermines your financial security. Clearly and systematically it helps you:

* Understand the many causes of earnings surprises, including fraud, overstated revenues, undervalued liabilities, and many more.

* Identify the early warning signals associated with particular earnings surprises, so you can take prompt corrective action.

* Prevent earnings surprises from happening in the first place by improving the quality of earnings forecasts

[Shivi]

hello.

Really These are very helpful tips

Thank you for sharing the info.

[KADY19]

hello.

Thank you for sharing your info..really nice one here...

[Rob]

I think I have posted this previously but it links in well with this. Here is a list of Warning Signs which looks at it from a banker's perspective but is a useful check list for any business owner.

The link goes straight to the document so just 'save' to wherever you want.

Business Warning Signs (http://www.smallbusinesssuccess.biz/Warning%20Signs.doc)