5 Signs How to Recognize Bad Debt in Your Small Business

Your business’ financial health is a mirror of how well your company is doing. That financial status consists of several different factors, all of which can manifest as warning signals. Bad debt seldom occurs without these warning sings. The key to avoiding trouble is to maintain vigilance and act quickly when a red flag pops up. Here are 5 typical financial warning signals to watch out for. 

 

An excessive amount of miscellaneous costs

 

Just like you have to carefully and frequently monitor the cash coming into your business as revenue, so you need to track the money leaving your company in the form of expenses, too. It isn’t rare for organizations to have one-time, small, or non-operating expenses that group together as “Other costs” on their income statements, including:

  • Interest paid on loans
  • Amortization or appreciation amounts
  • Income tax costs

However, the problem happens if miscellaneous cost balances are constantly rising. Unclassified, large costs make it difficult to adequately monitor where your cash is going and can be an indicator that you’re spending too much on items that aren’t relevant for the running of your business. Consider seeking consultations from an accounting expert to recategorize some of those costs.

 

Poor cash-flow

cash flow

A poor cash-flow state is always the first financial indicator that your business is overextended and that it will likely experience financial and operational problems. If you lack sufficient cash-flow, it will be difficult to acquire the supplies and materials you need to serve your next customers. Moreover, if vendors reduce you to COD terms or put you in a credit hold, delivering products or services will be hard.

Don’t let yourself get into this situation. Long before you begin to struggle with making payments, you’ll see your accounts payable (A/P) rising and your bank balance decreasing. By measuring these two figures every week, you should have enough warning to respond before it’s too late.

 

Not being able to access outside financial sources

If you can’t access the finance when you require it – this can be the beginning of the end of your business. Having a finance facility in place which is available when finances take a bad turn is a good contingency plan, so consider obtaining a finance facility when your company has good profits and positive cash flow. Another option is to extend supplier terms, which are effectively interest-free loans. 

A third one is to have access to online bad credit loans if the situation is dire and you quickly need a boost of cash. The last option is to foster a strong relationship with your bank and keep them informed on how the business is doing – so that if you have to approach them for investments, they’ll be well-informed on your company’s operations, which can assist you in acquiring finance.

 

You source income from non-operations

business

All income is not equal when it comes to monitoring the financial status of your company. The cash you acquire from sales and other core business operations needs to be the primary source of income in your income statement. It should also be enough to fund your short-term, operational costs. 

Dig deeper if the proceeds your company collects from long-term investments or selling fixed assets has been pushing your non-operating income for years. It’s crucial to make sure that your enterprise hasn’t been unintentionally relying on such income to assist its daily spending. 

 

You continually replace employees

High staff turnover can likely mean that you’re wasting valuable resources having to invest money and time to discover and train new talents. The first way to reduce employee turnover is to have a recruitment plan in place which outlines the attributes your future employees have to meet, such as:

  • Flexible working time
  • Any qualifications
  • Being a team player

Spend some of your extra time at this point to make sure you hire the right people for your business. Another way is to involve staff in managing the business – they will be more committed when they have a say in your company. 

 

Your financial status provides valuable insights into the profitability, liquidity, and performance of your company, both now and in the future. By closely examining potential warning signals as they occur, you’ll be better prepared to make the right decision for your business and avoid cash pitfalls that put many an enterprise out of the business.