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8 financial signs to watch out for

Recognize these eight warning signs so you can prevent your company from falling into financial ruin.
By Henry Ong |

Every entrepreneur\\\'s nightmare is to see his business go bankrupt and fold up. It becomes even more horrifying if the company were forced to sell its assets to settle its financial obligations. Very often, the symptoms of a financial disaster are ignored until it’s too late. Here are eight telltale signs of a financial disaster and how to prevent them from happening:

 

[related|post]1. Increasing debt-to-asset ratio. Buying merchandise on credit and borrowing money for expansion are normal business transactions. But if the total payables -- as a percentage of assets --increase over time, then it is a sign of over leveraging, a highly risky situation. A debt-to-asset ratio of more than 50 percent is considered potential trouble, and something must be done about it.  A business is highly leveraged if more of the company’s revenues go to paying debts. It also means a bigger drain on cash flow and profitability. 

 

2. Turtle-paced inventory turnover. This is caused either by slow sales growth or an increasing inventory without a corresponding increase in sales. In any case, the business is not managing its cash prudently. Too much cash tied up to slow moving inventory indicates liquidity problems in the near future. 

 

3. Unpredictable and erratic sales. When sales become irregular, so do cash collections. And when cash inflows become highly volatile, the business may not be able to finance all its disbursements and payables. This may result in the company regularly taking out bank loans to fund its working capital needs to sustain the business.

 

4. Weakened pricing power and deteriorating gross margins. These usually happen when the market becomes highly competitive, forcing the business into a price war. It’s usually not a good strategy to compete on price, aside from the fact that doing so would lower the business’s overall profitability.

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