Leaders often refuse to face the fact: their business is on the brink of a financial abyss. This situation materializes over time and rarely unexpectedly; it is often the result of several months of carelessness and tolerance. In this regard, the first signs of a crisis need to be addressed as quickly as possible when they occur in order avoid drift. Here are some early signs of financial hardship:
- Rapid growth: Being able to grow your business at a rate of 30% per year is a good thing to the extent that its working capital is adequate and able to support such a growth. What happens when there is a 30-day delay between disbursements and collections? These must be financed, and it becomes imperative that the funding be adapted to the needs of the company.
- Significant financial losses: Repeated and significant losses cut into the capital that has built up over time. These losses will be financed by the bank, through a capital injection by the shareholders or by the suppliers of the company. In any event, to ensure the sustainability of the business, the causes of its financial losses must be identified, and an action plan must be put in place.
- Excessive inventory build-up: On one hand, the bank limits the value of the inventory for borrowing purposes, in dollars and percentage, and, on the other hand, does not fund excess inventories. In that sense, management must acquire tools to identify these inventories and must consider liquidating them. Is it better to preserve this inventory in the hope of selling it at full price or to liquidate it quickly at a lower price?
- Losses of major clients: Serving high-caliber clients is commendable. However, management must be sure to limit the concentration of its revenues with a single client. If this client ceases its operations, the business would suffer more than in the case of a marginal customer. In an ideal world, a business diversifies its risk by serving multiple customers and insures them in order prevent the risk of loss or insolvency.
If you are currently experiencing one or more of these situations, make sure to talk to your advisor to analyze your level of risk. By allowing the situation to deteriorate, you’re exposing yourself to unwanted consequences, including the reminder of advances made by the bank.
Reacting quickly to the warning signs greatly increases the chances of a successful restructuring, as you will have more options and time to make changes, all without the pressure from your banker or your suppliers.