Keeping the balance sheet “out of the red” is a top priority for any business owner. To do this and “stay in the black”, it’s important to be regularly scanning the horizon for any signs that you could be heading towards rough financial waters. There several indicators of potential financial trouble.
Five financial red flags
While every business is different and is exposed to different risk factors, the below are five common financial red flags that could trigger financial uncertainty for your business
- Significant regulatory changes
- Redundant business model
- Loss of key customers/clients
- Inability to pay wages
- Inability to pay creditors
Some of the above may be out of your control, but something you can control is how you react to them. Staying out of financial trouble often comes down to being responsive to change and being willing to act fast when things don’t go quite to plan. In essence, the best way to deal with red flags is to be agile. As soon as you encounter a red flag, go into problem-solving mode. Failing to do so could see your business in financial trouble further down the track.
How to mitigate your risk
The following steps can help to mitigate risk:
- Assess your current financial position. How well is your business performing? Does it have the cash flow /capital to weather a potential financial storm?
- Estimate the damage. Determine whether this financial red flag is a seasonal blip or one-off occurrence, or if it’s representative of long-term, steady decline.
- Think strategically. Avoid knee-jerk reactions. Think in bigger picture terms about what might be causing financial difficulty, and how this problem could be solved.
- Set goals. Set short- and medium-term goals or targets to improve your financial position.
- Speak to an expert advisor. Don’t risk weathering this storm alone – call in some extra support to help guide you to calmer waters.
There’s no question that encountering financial troubles can be terrifying. But you’ll be relieved to know it’s not always fatal and happens to the best of us. It’s rare to find a business owner that hasn’t had to weather a few financial storms. The most important thing is that you learn from any mistakes made. Mistakes can often be a good thing, as they reveal your business’ weaknesses and you can then take steps to strengthen these areas for a more robust overall model e.g. a financial red flag might help you to understand the cyclical nature of your business, so you can prepare for seasonal downturns.
Have you factored in non-financial KPIs?
No one wants their business in financial trouble. So another way you can keep financial problems at bay is to carefully monitoring both financial and non-financial KPIs. Each KPI will say a lot about how your business is tracking towards meeting its goals.
It can also be effective to work through a root cause analysis to identify problems, and seek expert independent advice to help shine a light on possible blind spots.
Last but not least, it’s also vitally important to stay competitive within your industry – if you lose your competitive advantage, this can put you in a tough position. The marketplace can accommodate businesses of all shapes and sizes, but you want to find a niche. If you’re solving exactly the same problems as your competitor, then the only factor you can compete on is price – it’s much better to find a point of difference in your products and/or services.
Businesses that innovate, and offer unique solutions, tend to be the ones that survive even the most tumultuous of financial waters.