Be on the alert for signs your business might be in trouble

If unpaid bills are piling up to the point where suppliers are cutting you off, that’s an obvious red flag you shouldn’t ignore, experts say (Getty Images/aldomurillo)

No business owner likes to face the prospect of saying goodbye to the company they have founded and nurtured. 

But when the going gets tough, survival can sometimes depend on recognizing the telltale signs of trouble early—and preparing accordingly.

Here are some red flags that can help you tell if it’s time to consider your options—and what some of those options might be. 

1) DWINDLING CASH FLOW 

The No. 1 factor that determines a company’s viability—and the one that really dictates all the rest—is cash flow. “For any of the businesses we advise, the concept of having a cash reserve and a 13- or 14-week projection of future cash flow is critical,” says CPA Sandy Lyons, CIRP and a senior manager with Grant Thornton Limited. “And in the current environment, it’s especially important to build ‘Murphy room’ into your projections, based on the principle that whatever can go wrong will go wrong.”

CPA David Sieradzki, CIRP and managing director at KSV Advisory Inc., agrees. “The COVID-19 crisis has shown us that many businesses didn’t save for a rainy day—they were basically living from one week to the next (or one payroll and rent payment to the next). Many of the businesses that have filed for bankruptcy or Companies' Creditors Arrangement Act (CCAA) protection in the past few months—such as some small and large retail chains—were already distressed long before the pandemic began. Others are still working with their lenders and advisers to consider restructuring options and determine if they can continue to operate as a going concern. So while May and June experienced a record number of CCAA filings (10 and 12, respectively), we unfortunately might not see the true impact of COVID until later in the year or in 2021.”

2) LEANING ON SUBSIDIES VS. STRATEGY

One standout factor in the current crisis is the unprecedented number of government programs designed to help small businesses weather the crisis.

As Lyons points out, “At one point, there were more than 300 different programs available depending on province, municipality and industry, so it’s important to know which ones apply, and at what cost in terms of personal guarantees, covenants or future repayment commitments. Evaluating those issues can become a full-time job.”

Whatever program you choose, it’s important not to consider it as a solution in itself, says Sieradzki. “Simply qualifying for subsidies doesn’t give you a viable business. In fact, it might be delaying the inevitable. You need to make sure you are bridging to a place where you can carry on without the extra support.” 

3) PRESSURE FROM SUPPLIERS

When cash inflows have dropped off, companies are forced to extend their payables and manage their cash flow, says Sieradzki. 

“But if unpaid bills are piling up to the point where suppliers are placing you on COD or cutting you off, that’s an obvious warning sign,” he says. “That means the payables have been stretched as far as they can be stretched. This was the case before the pandemic as well—the pandemic may have accelerated cash flow issues for certain companies, but those businesses were likely distressed well before the onset of COVID-19.” 

4) CONCERNED LENDERS 

If you have a bank loan or secured creditors who have taken assets as collateral, you are going to need to generate enough positive cash flow to keep them onside, says Lyons.

Of course, that is not always possible. That’s why, even though a number of banks have eased their lending restrictions by offering interest-only payments or extending additional loans, many businesses are not taking advantage of them. “They are saying, ‘We’re done. We cannot continue,’ ” says Lyons.

5) WAVERING COMMITMENT 

Small business owners often put their own personal wealth on the line to obtain financing for the business, whether it be through co-debtor agreements or personal guarantees. So if they run into cash flow problems, it becomes a matter of deciding how much more of their personal wealth they are willing to commit to the business. 

“Entrepreneurs are always admired for their optimism,” says Sieradzki. “But in this environment, they need to take a hard, honest look and decide if their core business is still viable. They need to be realistic in their projections and planning. And their advisers and consultants also need to add some realism to the mix.”

Lyons agrees. “Normally I would tell people not to put more money into their business unless they know how and why they are doing it,” says Lyons. “Ultimately, though, they need to believe in their company’s ability to survive. If they don’t, it will be hard for them to sell the likelihood of success to creditors or employees. That’s because in some cases, the numbers don’t prove what might be possible.” 

WHAT ARE YOUR OPTIONS?

Even if multiple warning signs are flashing on the horizon, bankruptcy is not always the only option. As Sieradzki points out, “There’s a right process for every situation, and understanding each option and the differences between them is fundamental.” 

Lyons echoes that thought. “An insolvency professional, consulted when financial problems are first anticipated, will explore all options before recommending you hit the fail button,” he says.  “For example, it might be possible to find an acquisition partner or form a strategic alliance leading to a merger. Or you might file a holding proposal under the Bankruptcy & Insolvency Act, where your existing creditors are held in abeyance while you come up with a plan to sell your assets or change your business model to repay the creditors in the future.”

No matter what options are on the table, however, gaining buy-in from your suppliers, lenders and employees is essential. “You need to know whether your key stakeholders will work with you. If they won’t, closing the doors often becomes a necessity,” says Lyons. 

Timing is also critical. “If you see an insolvency professional early enough, you might be able to file a proposal with creditors and survive as a restructured business,” says Sieradzki. “It really comes down to a question of viability of the business and having the time to evaluate options. If you wait until the day before payroll is going to hit and you don’t have the means to fund it, the result is obvious.” 

MORE INSOLVENCY RESOURCES

Are you a director of a company that is insolvent or heading into insolvency? Check out CPA Canada’s guide and bulletin on what boards of directors and management need to know. Also, listen to our small business webinar series for information on key topics ranging from financial statement basics to effective money management. 

And read on to find out what small businesses can do to survive and pivot in the current crisis—and how you can help them weather the storm.