Is my Company in Financial Trouble?

We live in turbulent and uncertain economic times. Many companies thrived during the pandemic, only to have business slow down significantly post-pandemic. Others struggled during the pandemic and continue to struggle as we return to the next “new normal”. There is a lot of uncertainty – economic (inflation, supply chain, interest rates, availability of cash), political (in the US and elsewhere in the world), technological (growth of AI, rapid continual technology shifts), and labor shortages. Many tech firms are finding themselves contending with high churn, low close rates, and longer product development cycles. During recent conversations with peers, customers, clients, and former colleagues/direct reports, it’s obvious to me that while company financial health is top of mind for many folks in leadership, it is even more of a concern for staff-level employees. The reason for this is simple. While the top managers in organizations often have visibility around the factors I discuss below, many staff-level employees do not have that same level of information. And if there isn’t transparency by the company leadership, then these employees may be caught by surprise if, and when, the company’s financial situation becomes dire. Unfortunately, that can lead to speculation on the part of these employees, which can be counterproductive and lead to incorrect conclusions.

So, at the request of some staff-level humans in my network, I’d like to share some warning signs that could indicate that your company is in trouble or is perhaps in serious decline. This is still speculative; however, it is much more fact-based than purely guessing based on “hunch”, heresay, or company gossip. This type of company financial distress or decline could ultimately lead to layoffs, business challenges, a bankruptcy declaration, or the company could simply cease to operate. Sure, these signs are visible in public companies due to reporting requirements. What I’m talking about here is private companies with less reporting requirements. It’s often harder to discern what is happening at a private company unless management is transparent about the situation. If you suspect that the company is in trouble and management isn’t being forthcoming about it, staff-level employees should pay attention to the following specific signs noted below. One disclaimer - it's essential to note that these indicators can vary across different industries and organizations, so your mileage may vary.

1. Delayed Salary Payments or Payroll Issues

• If there are delays in payroll deposits or if the company is consistently having payroll problems, it could be a sign of financial distress.
• The same comment applies to slower expense reimbursements, or if the company starts questioning expenses which were considered routine in the recent past.

2. Reduced Employee Benefits

• Cutbacks on employee benefits, such as health insurance, retirement contributions, 401K matching funds or other perks, may indicate that the company is trying to rapidly reduce costs.

3. Freezing, Delaying or Cutting Hiring

• A sudden halt in hiring or, worse, layoffs can be a clear indication of financial difficulties.
• One comment on layoffs – many companies execute layoffs but try to position the terminations as “performance in nature”.
• If the layoff is large, or if the employees terminated are strong performers, the company might be camouflaging a “layoff” as performance-based firings to avoid the institutional stigma that comes with having to cut costs.
• Companies are often worried about their customers perceiving them to be in the type of financial distress that drives layoffs, for fear that service levels will also decrease as a result.

4. Reduction or Elimination of Bonuses

• If the company traditionally pays out bonuses but suddenly reduces, restructures, or eliminates them, it could suggest financial challenges.

5. Cost-Cutting Measures

• Visible cost-cutting measures such as restrictions on travel, training, or other discretionary expenditures may be implemented to conserve resources.
• This could be prudent and pre-emptive cost cutting, or it could be a frantic effort to reduce spending to avoid an imminent cash crunch.

6. Increased Workload with Fewer Resources

• If the company is struggling financially, staff may find themselves handling more responsibilities with fewer resources, which can lead to burnout.

7. Decline in Company Stock Value

• For publicly traded companies, a declining stock value may be a sign that investors are concerned about the company's financial health.
• In private organizations, if the investors will not inject additional needed dollars into the organization, it could be a sign that they want the company to cut expenses drastically before they are willing to increase their investment.
• This behavior on the part of investors may also signal a desire to make a “short sale”, where the investors only recoup their investment (or endure a loss).

8. Late Payments to Vendors

• If the company consistently delays payments to vendors, it may indicate cash flow problems.
• The level of importance of the services provided by the vendors who are unpaid will often reveal how dire the situation is at the company.

9. Frequent Leadership Changes

• Rapid or repeated turnover in top management positions (particularly at the C-Level) could suggest internal strife or an attempt to address financial issues.
• You also might see less engagement by top management at a company with a developing dire financial situation.

10. Decreased Customer Base or Sales Decline

• A noticeable drop in customers and/or a decline in sales can be a red flag for financial instability.
• Churn is a four-letter word in Software as a Service organizations (SaaS) and in other recurring revenue subscription-based companies. Nothing kills a SaaS company faster than churn. If churn is increasing and/or if service levels to clients are decreasing, that could point to financial troubles at the company.

11. Increasing Debt Levels

• Monitoring the company's debt levels is crucial. An increasing amount of debt or difficulties in servicing existing debt may indicate financial trouble.

12. Poor Financial Reports/Performance

• Regularly reviewing the company's financial reports, if available, can provide insights into its financial health. Look for signs of declining revenue, increasing expenses, or declining profitability.

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13. Reduced Innovation or Product Development

• As organizations find themselves cash-strapped, they may devote less time and energy into their product development cycles. This may manifest itself as delivering less customer facing product enhancements, or as continual delays in rolling out development that is already in process.

14. Legal Issues or Regulatory Trouble

• Ongoing legal problems or regulatory issues can be an additional burden on a company's financial health, or it can indicate that the company isn’t following guidelines due to financial challenges.

It's important to note that these individual signs may not necessarily mean that a company is in financial trouble, but a combination of these factors should clearly raise concerns. If employees observe multiple warning signs, it may be prudent to seek clarification from management or explore external sources for information about the company's financial status. Or it might be time to polish up your resume and start the process for finding a new position. Remember to trust your gut in these situations; people often ignore the indications of company financial distress because they believe that “this cannot possibly happen to their company”.

#layoffs #transparency #bestpractices #challenges #financial #examine

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