Business failure is not an overnight occurrence. The process of going out of business is gradual, often taking three to four years and most don’t even realize they are in trouble…until it is too late!
There are a couple of red flags that just might be telling you you’re in trouble without realizing it. As you review the danger signs below ask yourself “Is this me” Am I in that situation?” If so, you may be in trouble and not even know it! If some of these red flags apply to your business, it’s time to make some changes.
Is Your Salary Realistic?
Are you paying yourself a regular and reasonable salary? And is that salary coming from the current income and not from borrowed funds? Too many business owners indicate they “just take money as they need it”. If you are unable to draw a reasonable salary from the business on a regular basis, that is a danger sign. It may simply be a pricing problem or receivables problem but take it as a red flag and find out what is going on. As the owner of the company, your wages need to be factored into your pricing. If you wait to take whatever is left over after you pay your bills, there won’t be anything left.
Your Credit Line
If you line of credit growing? A line of credit is designed for one purpose and one purpose only. It is to be used for short-term borrowing against receivables. If that is actually how it is being used, your line of credit will show lots of activity but should come down to zero at least once or twice a year. If, however, your total line of credit is constantly growing, this too is a red flag telling you “Trouble Ahead!”
How Are You Paying for Equipment?
Are you able to pay for new vehicles with cash? Equipment replacement costs are typically the second highest cost of doing business. When products and services are properly priced funds will be available to pay for new equipment—with cash. If you are constantly finding yourself borrowing money when it is time to purchase a new piece of equipment, chances are you are not priced properly and this is a red flag.
Are you current with all your suppliers or are you using them as your bank? Cash flow P&L’s measure real dollars IN and real dollars OUT. Payables will not be reflected in the cash flow P&L statement. Use the balance owed your suppliers as a red flag. “Healthy” companies pay their suppliers on time the majority of the time. “Unhealthy” companies owe their suppliers increasing amounts of money! How do you stand with your suppliers?
How About Your Taxes
Are your taxes current? Unpaid taxes are not just a red flag. It is very serious for your business and can cost you large amounts of money in penalties and interest—not to mention possible jail time. If you are not paying your taxes on time (payroll or personal) it is a GIANT red flag…Trouble is on the way!
Do you have REAL money left in your checkbook each month? I don’t mean that you’re your P&L says you made money. I mean do you have real cash in your checkbook after you have paid your expenses. When all your bills are paid, your line of credit is at zero, you are paying yourself on a regular basis, money is put back for the replacement of equipment, you are current with your suppliers AND you still have money in your checkbook—you truly are profitable. Cash is a real truth teller. Your accounts and/or accounting statement may or may not tell you that you are profitable but you can bet if all the things we’ve discussed here are in proper order—your business is healthy!
I often talk to contractors about attending our Planning for Profit Workshop. They tell me things like: “We are priced right”, “Sales are increasing.”, “Cash Flow is not a problem.” etc. When they are through telling me how great things are, I ‘ll say something like “I am glad everything is going so well for you. I assume that means you have piles of cash lying around, right?” Often the phone becomes very quiet. Take some time to review the Red Flags a bit more closely and then ask yourself if any of them apply to your business. If so, find out what the problem is… and find out quickly!