According to the Small Business Administration, about half of all newly established businesses last five years or more. Only a third survive to the ten-year mark. For a variety of reasons, companies that possess the stamina and skill to endure the early years of growth sometimes flounder as the business matures.
Why? In all too many cases, business owners disregard these four warning signs.
You start a business with a great idea. It catches on. Orders start rolling in and profits climb. But somewhere along the line you get distracted. You start diverting resources and time to other pursuits.
An example of a company diverting resources comes with the history of the Boeing Company, one of the world’s largest aircraft manufacturers. In the aftermath of World War I, Boeing built furniture and watercraft to bolster its bottom line. What if, during that season of dwindling revenues, the company had diverted all its limited resources toward sideboards and sailboats? Maybe we wouldn’t be boarding Boeing jetliners today.
If you’re routinely replacing and training new staff, you may be headed for trouble. Besides the added cost of recruiting, interviewing, and educating new employees, high staff turnover can adversely impact customer service and sales.
“Your employees are generally your most important asset,” offers Associate Partner Rich Middleton, CPA. “Take care of them and they will take care of you.”
Too many unhappy customers and your once-thriving business may begin to falter.
It’s great that your profit-and-loss statement shows an upward trend in net income. But that’s not the whole story. The cash flow statement is often a better tool to diagnose your company’s overall financial health. It shows how much money is coming into the business and where the funds are being spent.
“Cash flow can be a huge problem for a new business,” admits Manager Ren Cicalese III, CPA, MST. “Many entrepreneurs reflect sales orders as revenue in order to present a better picture to potential investors. This can be a problem for new businesses because the business may have to pay tax now on orders that won’t be received until later. This creates a cash flow problem that could crush a business.”
For example, you might have an aggressive sales staff that racks up orders. But if customers aren’t paying their invoices in a timely fashion, you may struggle to cover payroll and accounts payable. As the old saying goes, “Cash is king.” Uncollected accounts receivable won’t pay the bills.
Rich Middleton, CPA also recommends that new business owners “focus on cash flow from operations. If your positive cash flow is being generated by borrowing from banks or owner financing, you may not be as healthy as you think.”
Technologies come and go. Customer needs fluctuate. Today’s hot-selling product becomes tomorrow’s obsolete inventory. It’s true that determination and drive are crucial to the success of any business. But if those traits lead to inflexibility in the face of changing conditions, the company may be headed toward bankruptcy.
Pay close attention to the warning signs and the advice from Alloy Silverstein’s CPAs and business advisors to make changes to your emerging business going forward. There still may be time to adjust course and a CPA can help you navigate your current issues and also what needs to be addressed at tax time.
“Although business losses are never good, your taxable loss may be available to be carried aback to a profitable year to obtain a tax refund,” says Mike Engleman, CPA.
In addition to tax assistance, we can help you incorporate business data dashboards so that your key startup metrics are always available at a glance. If you have further questions about strengthening your company’s long-term prospects, let’s have a conversation.
Contact us for guidance and application to your individual situation →
© MC 2017 | “Business Tips” are published monthly to provide useful business information. The business information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.
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