Below are some of the signs, as part of the procedures that corporates must follow, to assess if the company is in financial distress. Looking and analysing the following and other indicators of financial distress could assist the company to detect the risks and costs that could occur.
A financial distress report would then include all the indicators assessed and state how they will have negative impacts on the finances of the company and why they were considered as ones that will eventually impact the company’s financial position negatively.
1. Cash Flow
The first sign that things are going wrong is a constant lack of cash. The adage that cash is king exists for a reason. All businesses suffer periodic dips where cash is tight. But if cash flow is continually a problem, the business is in trouble. If a business is continually spending more than it earns unless it is deliberate and well-funded (as with some tech businesses at launch) it will lead to problems.
2. High Interest Payments
This could indicate poor financial health and be a sign your bank or other lender is suspicious of your viability. If lenders view you as high risk, funding debt will cost more. It is also a bad sign if lenders always seek stronger personal guarantees or security against any money they lend.
3. Defaulting on Bills
Everyone misses a payment or forgets a bill, but if the frequency with which it occurs increases, it suggests a business cannot pay its way. This is a sign it is underfunded, is not chasing debts hard enough or is heading to liquidation. Defaults on HMRC or on other formal arrangements can be particularly damaging. It can also be bad for your reputation and that of your business.
4. Extended Debtor or Creditor Days
Another sign of possible trouble is a rise in either debtor or creditor days. If your business must delay payments to creditors, this can force some suppliers to cut off the supply of vital components or ingredients. Likewise, if you are unable to effectively chase payment it may cause future cash flow problems. Either way, sudden changes in these numbers should be investigated to see whether they are signs of something more serious.
5. Falling Margins
Ask any experienced entrepreneur and they will tell you that for long-term survival what matters are profits, not sales. As the old saying goes, turnover is vanity, profit is sanity. Falling margins suggest that costs are too high, and prices or income is too low. This is not a sustainable position.
It may sound simple, but businesses in distress are rarely happy. Owners and managers, who can sense something is wrong (but may not be sure what) get stressed and pass it on. They start cutting at random to make savings or deploy sudden switches in strategy to try and revive things. Lots of senior people may leave in a short time.
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In Conclusion, the report is necessary because once the all the identified indicators that causes the financial distress have been assessed and the results clearly indicates that it affects the company’s finances negatively. That will assist the managers or owners of the company to quickly come up with the remedies that would be taken into consideration to minimise or reduce the risks that leads to financial distress.
Should the company fails to clearly use the appropriate procedures and also fails to identify the exact possible indicators that may leads to financial distress that could pose a huge danger to the company leading to the issue and the questioning of the companies going concern and liquidity. Therefore, it is always advisable that company usually analyse its financial position and other signs that may lead to financial distress to ensure that they should there be a issues it can be identified quickly and action taken to avoid the bankruptcy and financial distress. Contact PATC today.