Doing business on credit always involves the risk of non-payment. When it comes to your customers, a business may not show outward signs of trouble until it is too late. By then, it would be difficult, if not impossible to recover payment from it.
However, there are several symptoms of distress that you can look for. These can happen to any business, no matter how healthy they may seem. A changing economy and volatile environment mean that business conditions can deteriorate over time.
Here are five of the most common signs that a business is in trouble.
Worsening financial health
A company’s finances is its health meter, providing valuable insights into the overall health and performance of a business. Signs of worsening financial health include declining revenues, decreased profits, and increasing debt. These financial burdens can impact the company’s profitability and financial stability, as well as raise questions about its viability as a going concern.
Unpaid debts
A shrewd business will use debt productively, for example to purchase equipment or finance expansion. However, when a business becomes unable to pay its debts, it is a red flag for business trouble. As the debts mount and the company’s financial resources come under strain, there is a risk that the company may become insolvent.
Non-banking debts can be reported in CTOS electronic Trade Reference (eTR), a neutral collaborative platform for subscribers to share their customers’ non-banking payment information, positive or negative, for debt recovery.
Frequent changes in directorship and top management
While occasional management changes are a natural part of organizational evolution, a pattern of frequent turnover may indicate deeper issues. Constant changes at the top raises questions about a company’s stability and long-term prospects. It may also suggest disagreements among business partners, especially if a long-standing director is suddenly forced out.
Sudden change in ownership
There are various reasons why a company’s primary shareholders may exit the business, and the interpretation may depend on the specific circumstances. If the change in ownership is abrupt and not part of a planned succession, it could suggest financial difficulties or distress within the company. The previous owners might have sold the business to address financial challenges or avoid bankruptcy. It may also indicate internal conflicts or disagreements among shareholders.
Involvement in legal cases
Legal cases, especially those involving allegations of misconduct or illegal activities, can harm a company’s reputation. It can also strain relationships with business partners, suppliers, and other stakeholders. But more than that, litigation can divert a company’s attention and resources away from its core business operations, while incurring substantial expenses relating to legal fees, settlements, and court costs.
Recognizing these signs early and taking proactive measures can help you address credit risk issues before they escalate into more severe problems. With CTOS Credit Manager, you can get automated notifications on changes to your customers’ business conditions, including all of the above signs.
