Signs of financial problems
Some warning signs of future financial difficulties in businesses are obvious, but others are not so obvious. Knowing how to recognise them in advance can help your managers deal with the situation before it gets out of hand. Among these we have: Signs of financial problems
Uncontrolled Company Growth
Companies are constantly seeking growth in sales and market share. However, this expansion rate must be well planned to avoid losing control over working capital management, which could lead to increased financial debt and negatively impact company results.
Rapid sales growth comes with cash flow challenges, as the company will increase production flow, which will impact stock levels and accounts receivable. Often, it may not be able to extend its purchasing terms to help finance this increase in inventory and receivables.
Managing the supply chain is also a major challenge during rapid sales growth, as the following situations may arise:
Insufficient storage space to accommodate the increased stock of raw materials and finished products;
Need to expand the workforce and train employees to handle the increased movement of products and materials within warehouses;
Necessary changes and improvements in the factory layout to meet new production demands;
Insufficient transportation capacity to receive materials and distribute finished products;
Suppliers unprepared to meet the new demand for raw materials.
These situations typically lead to increased errors across all company processes, resulting in loss of quality, customer dissatisfaction, and financial losses. "Whenever urgent decisions are made, costs tend to be higher, and the decisions are not always the best."
In terms of factory operations, possible consequences include increased overtime, loss of productivity due to more frequent setups, increased equipment maintenance costs, hiring untrained employees, inefficiency, rework, and product losses. It may also be necessary to add new work shifts, which can lead to additional costs that sales margins might not support.
It’s important to note that creating demand in the market through effective marketing without adequately meeting it could provide an opportunity for competitors to serve your market better and gain market share.
You Can Avoid This Situation!
When deciding to grow rapidly, you need to ensure that the pace is feasible for your capacity to monitor, manage, and resource effectively in the short term. Otherwise, growth can become a major problem for your business. "It’s important to surround yourself with the right people to grow successfully and profitably, ensuring proper management of cash flow, credit lines, and other productive resources."
Elaborate Tax Planning Schemes to Ensure Day-to-Day Viability
We all know that taxes in Brazil are among the highest in the world, and companies often struggle to be profitable due to this tax burden. When financial difficulties arise, many business owners resort to tax planning, separating companies, or opting for different tax regimes to pay less tax. However, these strategies don’t always produce the expected results.
If you choose this path, you should be aware of the risks. Often, managing these new companies effectively requires hiring additional staff, expanding IT infrastructure, incurring additional accounting costs, and creating new processes. Corporate complexity increases, likely involving professional fees to structure these new entities. After this decision, you may also need ongoing legal advice, with the risk that tax authorities could link all operations in the future.
We’re not suggesting you avoid tax planning, but we believe that when considering certain solutions, all previously mentioned factors should be taken into account.
Reflection: If the only way to keep your business competitive is through tax gains, you likely have other issues that you’re not recognizing.
An Acquisition That Doesn’t Go as Planned
When acquiring a company, the integration process takes time and often requires additional investments beyond initial estimates, especially if the acquired company is not performing well economically or financially.
The challenge of integrating corporate culture is often underestimated. A company’s strength often lies in its team. If employees don’t align with the new values, vision, mission, and policies, integration will be difficult and will impact operations. The hardest thing to change is corporate culture.
Synergies are often overestimated in acquisitions, due to a lack of thorough analysis of structures, processes, skills, specific needs, leadership, IT, market positioning, and operational capacities. If this evaluation is flawed, the acquiring company may face unforeseen additional costs, preventing profitability from the M&A process.
How to Avoid Problems When Acquiring a Business?
It’s important to invest time and money in thoroughly reviewing financial records, legal matters, market positioning, team capabilities, operational capacity, and other aspects of the company you intend to acquire. Conducting due diligence can save you from costly surprises after the acquisition. The due diligence process will also help you plan the integration of your new business.
Changes in Management Systems
Having efficient management tools is essential for a company’s survival, but setbacks are common during system implementation. Management tools can cost much more than expected, possibly leading to information loss over a period, which can negatively impact day-to-day decision-making. Often, we focus on software costs and overlook the cost of internal team migration. We may also not anticipate possible employee resistance to new technologies or fail to change processes necessary for productivity in the new technology environment. Sometimes, to operate a new system effectively, additional staff are needed.
How to Ensure the Successful Implementation of a New Management System?
Understand the software alternatives available on the market;
Assess if your processes will function well in this new environment;
Redesign processes if needed;
Visit companies that have implemented this software;
Develop a solid plan;
Form a dedicated implementation team;
Train your staff;
Clearly communicate that this will be the new operational platform for the company;
Assess equipment capacity;
Estimate the extra time employees will need to implement the system;
Review your data records;
Be rigorous in your goals.
Implementing a new software system is a strategic project and should be closely overseen by the company's top executive.
High Levels of Debt
A company's debt level depends on many factors, such as industry, company maturity, working capital policy, investment needs, financial status, internal policies, and short- and long-term funding policies. Companies with high levels of debt have less operational flexibility and are more vulnerable to unexpected events. Companies with low debt and adequate cash reserves are more likely to capitalize on operational cost savings and profit opportunities. Another important aspect is that the more leveraged a company is, the higher its market risk and, consequently, the higher interest rates it tends to pay.
The debt structure should be balanced between short- and long-term debt. Ideally, long-term projects should be financed with long-term funds. For such projects, consider costs beyond equipment and installations, including new working capital needs. Without this financing alignment, companies may face higher financial costs, as they may need to resort to short-term financing, which isn’t always available.
How to Avoid Excessive Leverage?
To prevent increased financial leverage in your company, it is important to:
Develop an investment project and conduct scenario and sensitivity analysis;
Monitor profitability monthly and check if cash generation is sufficient to cover long-term financing, debt interest, dividends, and working capital formation;
For new projects, consider unexpected costs and establish adequate financing structures from the start;
Retain some profit to build working capital;
Before new investments, check if you’re already maximizing the use of your assets;
Optimize stock levels;
Adjust your receivables policy as needed;
Negotiate longer payment terms with suppliers at no additional cost.
Poorly Planned Succession
The idea of passing a business from one generation to another is admirable, but this is one of the biggest challenges a company faces when founders decide to hand over control to the next generation.
Potential issues include:
Family shareholder conflicts that impair effective management due to emotions affecting consensus-based decision-making;
Successors often lack preparation or even the desire to assume leadership roles;
Many shareholders and heirs;
Lack of financial clarity;
Key employees may resist a new leader they don’t see as competent, potentially leading to demotivation and even their departure.
How to Ensure Successful Succession?
A succession plan should be created well in advance to prevent business interruptions. This plan should consider successor capabilities, current or future conflicts, shareholder agreements, and corporate governance. The company may also evaluate hiring professional managers or even consider selling the company.
Companies with High Cyclical Activity
Companies with cyclical activity tend to have production and sales concentrated during specific times of the year. Examples include companies producing seasonal items like panettone, Easter eggs, or agricultural products.
In cyclical companies, the following events commonly occur:
Concentrated purchases before production starts;
High inventory levels;
Need for additional labor during peak periods;
Training of this additional workforce;
Underutilization of fixed assets like machinery, equipment, and buildings;
Sales concentration;
Increased transportation demand;
Higher working capital needs to keep operations running;
Increased short-term financial debt;
Higher operational losses due to the pressure of meeting fast-paced demand;
Increased credit risk;
Profitability only during a few months of the year, followed by losses in off-seasons.
How to Avoid Issues in Cyclical Industries
Running a business in a cyclical sector requires careful planning to prevent cash flow and profitability problems. This planning should consider the company’s annual cycle, not just the seasonal period. Over time, you may develop new products and markets to reduce seasonality in your business. Effective tax planning, sufficient credit lines at fair interest rates, supplier negotiations, preventive equipment maintenance, and an efficient production plan are also essential strategies.
Business Concentration
When we talk about concentration, we mean depending on a few suppliers, having a small customer base, a limited product portfolio, employees handling multiple responsibilities, or equipment working at full capacity.
High dependency on suppliers, customers, products, equipment, and employees can increase operational risks, potentially causing major losses or even halting operations.
However, some level of concentration will always exist in any company. You will always have certain suppliers or a customer group representing most of your sales, or a product line that sells more than others.
How Should We Act in These Situations?
First, assess concentration levels by performing a Pareto analysis on customers, suppliers, inputs, markets, and products to understand each group’s concentration characteristics. Then, develop a strategic plan to find ways to reduce dependencies and diversify as much as possible. Setting this as a plan and implementing it can improve medium-term results and reduce risks.
Financial Management Issues
Poor economic and financial management can lead to serious problems. Many companies lack reliable financial statements and fail to generate them monthly. Other companies generate monthly reports but with superficial analysis, failing to address urgent problems effectively.
Other critical issues that can lead to serious economic and financial problems include:
Lack of adequate credit and collection policies;
High delinquency rates;
Lack of knowledge of product sales margins;
Lack of knowledge of the break-even point;
Insufficient credit limits;
Inadequate credit lines for varied credit demands;
Poor control over bank fees and expenses;
Profit withdrawals beyond the company’s capacity;
Mixing personal and business finances;
Lack of cash flow monitoring;
No solid budgeting plan;
Currency risk exposure;
Underutilized assets;
Misconfigured systems, hindering information management.
How to Avoid Financial Management Problems?
Implementing efficient financial processes can help you streamline business operations and access needed information when required. Effective processes, controls, policies, and indicators are essential to mitigate risks (cash management, fraud, inaccurate costs, etc.). Setting up indicators to guide the organization is crucial in this process.
External Environment Challenges
Various external factors can pose risks, such as a highly regulated industry, market remoteness, fierce competition, wars, pandemics, currency risk, new entrants, political risk, reputational risk, among others.
How to Avoid External Environment Issues?
Conducting an external environment analysis as part of an annual strategic planning process can help identify emerging trends, analyze the competitive environment, and establish strategies to respond to potential threats. Monitoring transformative technologies in your sector is also essential.
If your company exhibits any of these symptoms, start taking corrective action immediately. If needed, rely on Valini Consulting—our firm has been helping businesses for 19 years with cost reduction, business viability, and financing sources.
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