Losing employees more frequently than you hire, making stagnant profit and having increased expenses than income, are not the only red flags showing that your startup is about falling off a cliff.
Carefully put together, these eight signs are clear warnings of a startup’s fall. Before we delve into this, you should have it at the back of your mind, that whether your company is at this point or not, you should look through carefully, think of sustainable ways for growth and get your startup on a solid footing.
- Negative cash flow
This is a situation where a company spends more money than it is making. Not to be confused with profit, a company can be making profit but have a negative cash flow and vice versa. Negative cash flow prevents a company from expanding and meeting up with short- and long-term liabilities.
- Inadequate accounting record
When a business does not have a grip on its financials, incorrect financial statements, lack of proper expense records and no authorisation for most of its activities, these are red flags against a company’s growth.
- High Management Drawings
This is when the owner of the business starts to withdraw money from the business account for his personal expenses. When this becomes too high, the business suffers.
- Very low return on assets
How much of your assets are you using to make your sales? Is your business having a low return on assets?
If the amount you’re making from sales is more than the worth of your assets, then that’s good. In cases where sales are below assets’ worth, that’s not good.
When your assets are more, it could mean you have more assets than you need and expenses are incurred on them while they bring no positive sales, or you’re not utilising those assets as well as you should to make sales
What you should do is sell or lease the assets you’re not using, ultimately preventing wastage.
- Negative growth rates in key indices
Key indices are sales, gross profit, net profit and the like. A negative growth rate on these is a warning sign that your startup’s sustainability is at risk.
- Increasing receivable paying period
Receivable paying period is the time it takes for you to recover your receivables. For instance, when a customer buys on credit, you recognise it as your sales though you haven’t received the cash; this is your receivable.
If it takes a very long period for the customer to pay, that means your receivable paying period is increasing and this will affect your cash flow as you would have incurred the money used to purchase the good, but haven’t received the money for selling it and your cash is tied up somewhere, leaving you without enough cash to run your operations.
- Reduction in payable payment periods
Payable is the opposite of receivables. It involves business owners purchasing goods from suppliers on credit and then the supplier asks for payments within a short period than you would have made enough sales.
You’re then forced to release cash although you’re not receiving cash, leading to negative cash flow.
- Increasing current liabilities
Here, we have current and non-current liabilities. For non-current, you have over 12 months to make payments, while current liabilities involve making payments within 12 months.
Once the current liabilities are increasing and more pressing, that means you need to stand firm to hold your startup well.
There you have it. You didn’t start up to fall back, so, understand where you’ve been getting it wrong and focus on a resilient win.