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7 Early Signs of a Distressed Business and How to Fix It

Passion for Scaling SMEs, Values-based Entrepreneur, Humble Warrior (in the making).


Is your company in distress? You sense the business is spiraling out of control? Read here about the early signs of distress and how to fix them effectively.

Many new start-ups spring up every year, yet 20% of them fail in the first year, while a staggering 60% of them go bust in the first three years. Even if they manage to survive, many businesses struggle with periods of distress.
The reasons for a distressed company can be anything from a market downturn, poor management, aggressive competition, to simply financial distress caused by an accumulation of bad debt. Add to the mix, innovative technological advancements with new distributive challenges entering the market place — creating compelling competitive advantages in traditional business landscapes. Companies that show reluctance to adapt and innovate are simply left outside the business playing field.
Fortunately, there are various warning signs to indicate that your business is going through distress or heading towards it. The best way for business owners to avoid ultimate failure is to look out for all the warning signs of distress early on.
Here are seven early signs of distress and some proven tips for a distressed business turnaround!

1. Loyal Staff Leaving & Low Morale

It is often said that your human resource (the lifeblood of your business) can make or break your business and it is true to a great extent. In fact, for most businesses, employee morale is the most accurate indicator of how well your business is doing. So, any key staff leaving or a loss of a loyal long-term employee leaves your business struggling to fill the gap they leave behind.
The most common tell-tale signs of overall low morale in your organization include de-motivated staff, an increasing reluctance to take responsibility for key tasks, and failure at the departmental level. Similarly, you might also notice increased absenteeism and an obvious lack of input during team meetings.
Since you cannot have a distressed business turnaround without re-engaging your staff, you have to look for ways to put your business on the right track. The best place to start is getting the right people on board and cutting the wrong ones loose. Revisit, redefine your mission- purpose of the company, and consider rewarding loyal staff with share options. Offering bonuses and incentives should motivate staff to not just aim for targets, but meet them. Furthermore, employees who proactively take initiative and demonstrate a willingness to go the extra mile, display significant potential, and should be earmarked for future advancement/promotion. Lastly, training and development programs help develop their skills and empower them to achieve more.

2. Declining Cash Flow

Another key indicator of financial distress is poor cash flow. Is your business having trouble meeting the monthly payroll or the overdue invoices? Chances are your business is going through financial distress. A negative cash flow statement shows that more cash is flowing out of the business than it is flowing in. And if it continues to remain negative over a long period, your business is headed toward insolvency.
So if your business is showing any signs of this, you must implement effective strategies to turn things around immediately. One of the best strategies is to find funds from within the business by cutting costs and unnecessary expenses, generally regarded as fluff that don’t add value to the bottom-line in the short term. With increasing amount of business activity moving online, serious discussions need to be had about the need for certain expenses, like luxury cars or swanky offices.
When it comes to cash flow, often too much coming out at one time, and incoming payments being delayed can make operations grind to a halt. So if you are noticing that your business is struggling to make timely payments to suppliers or employees, you may have a cash flow problem on your hands. With so many business transactions, it can be difficult to get to the root of this issue. Therefore, the best way to avoid cash flow problems is by getting into the habit of checking your incomings and outgoings on a daily basis.
Look to Create a 90-Day Action Plan to Generate Cash Quickly
Being familiar with how money is coming in or leaving your business can help you take the necessary steps to improve your cash flow.
You may seek the help of a business adviser, who can provide direction, while functioning in the capacity of a part-time CFO.

3. Declining Sales/Revenue over a Period of Time:

This is one of the most tell-tale signs that a business is in serious trouble. Sales are what keep businesses going. Without revenue, cash flow is impacted and that’s when companies rapidly decline, which could lead to an eventual bankruptcy, so take it as a clear warning sign.

To rise above such a situation, here are some steps you can take:
a) Re-evaluate Your Sales Process
Focus on incremental improvements and testing, measuring, and discarding anything that isn’t working.

b) Evaluate Your Competition
Ideally, you should analyze your competitors in order to find out what is working for them. Perhaps they are introducing new offers or have stellar customer service. Either way, you should try to emulate their success in a strategic manner.

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c) Talk to Your Customers
When all else fails, don’t forget you still have a very important resource at your disposal — your customers! Ask them what they want more of, or what it is that’s putting them off. It may come as a pleasant surprise when you find out that your customers are always willing to help. This is especially true if you’ve shared a good professional relationship with them. Since your customers are why you’re in the business in the first place, this is a guaranteed way to identify and address problems.

4. Late Payments from Customers

Businesses cannot sustain themselves based on the number of orders customers place. Payments that come in late can impact your cash flow significantly. This is especially true of outstanding payments that remain unresolved for months on end, as there is a higher chance that those payments won’t ever come in.
You should have a system in place to chase people who owe your business money. You should start charging in advance and give discounts when customers come through with early payments. You can also charge interest for overdue invoices, and bring a third party invoice finance company on board to help facilitate these measures.

5. Requesting Longer Payment Terms

Taking longer to pay back your creditors can either be a way to manage cash flow, or it could signal something far more serious. It can be difficult to get to the source of this problem. Again, this is likely to be pertaining to cash flow. In order to identify the actual leaks in the business, start by evaluating the financial, operational, sales, and marketing aspects.

6. Damage to Brand Reputation

It is common knowledge that a distressed business impacts the brand image. Slowly and gradually, customer interest in your brand starts to wane. Soon enough, negative reviews pertaining to your brand get around and your business suffers more blows. Before you know it, some other brand has replaced you in the market.
The best strategy you can adopt to revive your brand image is one that enables you to swiftly make definitive changes. You may consider doing this by focusing on the mission and vision of your company. You can also look to create a story around your brand, detailing how these testing times have helped your brand get back on track.
Treat this slump as an opportunity to come back with a vengeance; connect with your roots and core values. As for your customers and staff, being authentic and honest can go a long way.
If you feel, however, that there is no sense breathing life back into your brand, you can always re-brand. Re-branding can give the impression that your business is now bigger, better, and has more to offer. Do make sure your employees are notified accordingly. Additionally, get their input on the ideas and the changes you wish to implement before you revise your marketing strategy.

7. Not Adapting to Disruptive Innovators

Disruptive innovation is prompted when developments within an industry make way for new markets. New competitors who were previously disconnected from your market suddenly enter it and start accumulating market share. A recent example is that of Uber. They are a tech company that has managed to change the landscape of the ride sharing industry.
If you are operating in an industry where disruptive innovation is active, it will be in your best interest to sustain your existing market share by focusing on the things you do well. You could try to capture new markets, but only if you have done your homework, analyzed the opportunities, and made sure that it makes commercial sense. Reluctance and lack of agility to innovate and integrate technology is a sign of a distressed business. There is only one way for businesses to stay current and relevant, and that is by developing new products and introducing new variants to efficiently deliver these products. You can also stay relevant by proposing creative solutions or updating existing ones. All this is possible if you invest time and resources into understanding ever changing market landscapes & customer buying (needs/wants) behavioral patterns and preferences.

The Bottom Line

When talking about why businesses become distressed, internal and external factors are at play. Take heed of the signs mentioned in this article, and if you notice them, make sure to take pre-emptive measures to reverse the direction the business is heading and steer it to the right trajectory. Time is critical, before the issue gets out of hand and is irreversible. More often than not, a plan can be devised to bring your company out of distress and back on track. Any delays on your end, however, will either reduce the options you have available, or render them ineffective!

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2022 David Nahal

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