As the old adage goes, “Prevention is better than cure.” This not only applies to health and wellbeing but it also makes sense in terms of business. Think about it. It would be better to avoid a problem altogether rather than find a solution as it strikes. Achieving this feat entails that you should be well prepared and that you must also be equipped with adequate knowledge. One of the best ways to prevent financial distress is to know the warning signs and AABRS experts are here to tell us what these are.
- Long Outstanding Receivables – When much of your credit sales remain unpaid and uncollectible for too long, it could give rise to liquidity problems and cash shortages. Take a look at your credit policies. Are they too liberal? Is your collection function ineffective?
- Long Outstanding Payables – Likewise, when you have payables that have not been paid for a long time, you are risking interests and penalties. Plus, this can be seen as a sign of a problem. There’s no other valid reason for you to miss no your payments unless you’re short on the cash. Human error can also be a factor but with programs and systems in effect, this is rarely the case.
- Dividend Cuts – It does not necessarily mean that when a company cuts down or eliminates their dividend payouts, it is already on the verge of liquidation. There can be other reasons such as retention for reinvestment purposes. However, dividends are one of the first to go should an entity be in financial trouble. It is still worth checking just to be sure.
- Top Management Turnovers – Employees want to safeguard their sources of income and so if the boat is sinking, all passengers will want to abandon ship and save their lives. The same is true for businesses. If you notice defections in many top management positions, this should be a cause to worry. Remember that they are the first to find out about any problems that the company faces.
- Reduction in Employee Perks – All companies know that happy employees mean happy customers thus more profits. Businesses will try as much to give perks and benefits to staff but in the guise of financial distress, these shall be lessened to a significant degree if not cut off completely.
It would be far easier to prevent and keep financial problems at bay rather than try to fix it so better keep the above list from AABRS in mind at all times.