Accountants and financial analysts are highly skilled at identifying disturbing trends even after a quick look at a company’s financial statements. While it’s a given that they’re specialists and you’re probably not, you could do the same if you’re aware of the warning signs. Here are some of those red flags.
Increasing Receivables
A high level of accounts receivables is great only if you’re a hundred percent sure you can collect it. But the farther the due date of your account, the lower the chances that the customer will settle the balance. In this context,
Sorenson & Company says increasing receivables could mean you’re not effective at collecting balances.
Growing Inventory
This is only acceptable if you’re in the process of expanding your business offerings. But if this isn’t the case, it probably means you’re not moving your products fast enough, which could lead to a higher risk of spoilage or obsolescence.
Fixed Assets Disposal
It’s perfectly fine to sell equipment if they’re useless for your business operations or are not functioning well. However, disposing of them so you can obtain cash for
repaying debts or other short-term expenses isn’t recommended. Unless you reinvest the proceeds of the asset sale in your business, this move could hinder your operating revenue in the future.
Non-Operational Income
Your creditors and investors like to see stable income from continuing business operations. They don’t necessarily agree with other sources of income, such as those from investments or
asset sales, or huge one-time sales. These non-operational income sources aren’t considered as valuable since they’re probably one-time big-time deals.
Meager Patterns of Cash Flow
Some businesses look good on paper, but are suffering from insufficient cash flow in reality. Your investors might think you’re not collecting your receivables on time, overstating your revenue, or struggling to repay your loans.
To fully and accurately analyze the financial situation of your business, you’ll need to study your cash flow statement, income statement, and balance sheet, suggests an accountant in Salt Lake City. Get all these from the past two years, so you can more accurately monitor trends and compare them as you go.
It’s fairly normal for businesses to stumble from time to time and tighten the purse strings a bit. But if your business tightens your purse strings more often than usual, or if you’re familiar with any of the scenarios mentioned, do something about it now.
