How to know your company is in distress and heading for bankruptcy?By Suzzanne Uhland

Image courtesy of Stephen Day at Flickr.com

Companies are not always successful and, for a great deal of their existence, they will have financial, budget and as many problems as you can imagine. This is not rocket science and company owners understand this. But all of us have seen or known about companies that despite difficult times and financial distress, make purchases or spend money on things that aren’t needed, or CEO that don’t understand financial statements or that focus on certain things leaving behind other important parts of the company. Yes, we have all seen them. But this is the normal cycle of companies and their people. The hard part comes when a company is going towards failure and the owners or shareholders, even the staff, fail to understand, realize or just see the rough future that lies ahead. Here are some signs that your company is not doing well and that is past the point of no return and needs an urgent intervention to not fall in the pit of bankruptcy.

Financial statements:

For small companies and their CEOs is very important to understand what is happening with the cash flow. Imagine an athlete training for a Marathon and not keeping score of his or her progress. How can this athlete know where he or she is failing and how can he or she know what to improve and how to improve it? It works the same for a company that flies blind and has unclear financial information for the CEO and shareholders. There is no time to waste when the company has just lost a good amount of money. Experts say that it is better to receive the financial statement at the beginning of the month, the first 5 days, instead of at the end of the month, in order to know what is happening and not delay important decisions. It's dangerous to wait to find out that you just lost a ton of money.

Money losing customers.

We all are aware that there are some customers who are just not worth having. It is not only about the customer being annoying or demanding, some customers are, but bring very good business to your company, but also about some other clients that negotiate prices that are not enough to cover the costs. These clients are often demanding and very hard to please and when it comes to the profits generated by their purchase, it doesn’t represent that much for your profit and loss balance. So, why keep those clients? Failing companies make great efforts to retain any type of profit desperate for revenues without understanding the costs that it generates and falling into a spiral of unprofitable circumstances.

How you are spending your cash.

When companies are having serious financial problems, or are in distress, the most important issue that must be managed is how long will the cash last and then understand where to cut expenses and save money. This could include laying people off, but most of the times it is about cutting down on unnecessary expenditures. Sometimes it could be that new luxurious car the owner bought or spending lavishly on trade show displays, on equipment the company does not need, and on television advertising that does not generate measurable returns. This is one of the biggest causes of bankruptcy for many companies in the market. Big companies know how to overcome this failure which at the beginning is very common but needs to be addressed at the same time, at the beginning.

Organigrams and responsibilities.

So maybe your company is not big enough to already have a clear allocation of responsibilities and a clear organigram for the company. There is not one corporation that can perform optimally without a clear delineation of authority and responsibility and it is a very big mistake to do so. If the chain of command is not clear and there are no clear liabilities for certain processes, companies will be doomed. Companies that are near to falling into distress are the ones where accountability is passed from person to person. If there is one person in charge and that person knows what his job is, risk can be easily managed or decisions can be taken in time.

Calculating costs.

Maybe it seems like something everybody is aware of, but it is not. Many companies tend to do very informal analysis of costs and returns. This then leads to a big loss of cash and delays in deliveries. This is one of the first mistakes that consultants see in companies that are near to bankruptcy or are in serious problems and is one of the things that save many of these companies.

Image courtesy of Ken Teegardin at Flickr.com

Some of these signs are very common but many companies, employees, CEOs and shareholders fail to see them. Keep your eyes open for the signs and some big failures may be avoided.