Financial distress is a situation when an organization's resources are inadequate to meet its payment obligations and the organization is unable to pay its debts as they come due. When a company/business is financially distressed, it can be difficult to recognize signs early on as it starts developing over time. Here are a few signs that you should look for which will indicate your company/business might be heading towards financial distress:
- Frequent delays in making payments - One of the first signs of financial trouble would be the frequent delays in making payments such as accounting invoices, utility bills, or any other regular payments. If you notice difficulty in paying for these things regularly and on time, then this could be a sign that your company/business is facing some financial difficulties.
- Decreasing cash flow - A decrease in sales can lead to inadequate cash flow within the business since available funds may not be sufficient enough to cover operational costs. This lack of available funds can cause complications down the road if proper action isn’t taken quickly enough and remedied accordingly by increasing sales or decreasing expenses.?
- Increase debt load -? An increase in long-term debt or existing loan balances could mean that either too much money has been borrowed recently, indicating unstable finances or older loans have yet to be paid off thus creating further financial hindrances down the line if this isn’t resolved soon enough at least partly with additional income sources such as potential investments.?
- Lower profit margins-? As revenues within businesses start shrinking while expenses stay fixed – profit margins tend to shrink rapidly leading up to more serious cash-flow issues over time until significant changes are made like reducing operation costs where possible so more money stays within their pockets than otherwise expected before taking into account all running costs such as overhead expenses & any other liabilities owed.
- High levels of inventory present but not selling well -? Having high amounts of inventory stored unsold or neglected comes with certain detriments especially when dealing with outdated materials bound for disposal instead leaving little room for future liquidity within their current operations?
- Negative operating cash flow (OCF) -? It signals mounting trouble as the expenses need to be met without generating enough income from day-to-day operations; this could indicate an inherent problem in terms of pricing strategy or cost structure within the business model which needs rectifying sooner rather than later.?
- High Debt/Equity ratio – This suggests that creditors would have priority over any dividend payments you make out to shareholders should any unsuccessful investments be made which leave your firm in liquidated state; thus putting your shareholders at potentially great disadvantage if having contributed excess capital.
- High debt-asset ratio -? This means that the proportion of its balance sheet assets funded by debt (e.g., loans) is greater than the proportion funded by equity (e.g., funds from shareholders). A high level of borrowing signals increased risk since companies must pay off their debts with interest regardless of whether they make profits or not. As such, this can signify that a company may be under financial strain due to limited access to capital and/or lack of profitability due to weak demand for its products or services.?
