Businesses operating in Bermuda continue to face a challenging environment. Businesses are operating in a sluggish economy, which means that generating the cash to invest is difficult, and are having to constantly assess and adapt to the changing habits and demographics of their customers.  Business owners and managers who perform regular ‘health checks’ on their business in order to identify deficiencies may avoid potential pitfalls. 

 ‘Health checks’ can help uncover areas for improvement. Questions to ask include:

• Are there any operational issues which require immediate corrective action?
• Is the business operating in a shrinking or changing market?
• Are cash flow issues hindering investment in much needed process improvements?

The sooner warning signs are identified, the more time business owners and managers have to employ corrective action or implement the necessary steps to fix any issue. While every business is unique, there are some general warning signs, which can be grouped into four categories: (1) Financial Statements, (2) Cash Flows, (3) Creditor Relationships or (4) Other.

Financial Statement Warning Signs

• Inability to generate profits over several periods
• Undesirable liquidity ratios (e.g. current assets divided by current liabilities) which are less than 1.0
• Ongoing negative net asset position (Total Assets less Total Liabilities)
• Increasing or ageing inventory (stock) balances over multiple periods, without a corresponding uptick in sales
• Increasing trade creditor balances over multiple periods, without a corresponding uptick in sales

Cash Flow Warning Signs

• Breaching overdraft limits with your financial institution
• Inability to pay suppliers to terms agreed
• Regular cash “pinch points”, e.g. on scheduled employee pay dates

Creditor Relationship Warning Signs

• Overdue statutory taxes (e.g. payroll tax) or non-payment of insurance premiums
• Paying creditors outside[PM1]  their set credit terms
• Receiving statutory demands
• Having to request special arrangements for repayments
• Making round sum payments or part payments towards invoices

 Other Warning Signs

• High staff turnover or loss of key personnel
• Shareholders and other stakeholders looking to exit the business

Identifying the warning signs in a timely manner may allow the business to remediate its issues while that remains within the control of the business. Failing to take corrective action in light of the warning signs identified may lead to long term problems which may include the business losing its ability to trade to its maximum potential, the deterioration of business relationships and personal reputation and the creation of undesirable perception amongst staff and customers.     

Business owners, rightly having a strong emotional connection to their business, often find it difficult to look objectively at the root causes of issues. It is important to remain dispassionate and logical when identifying warning signs and formulating a plan to take the business forward.