Written by: Nolan Wentz, CPA
- Decreased profit margins: A decreasing gross profit percentage can be an early sign of financial trouble, even if sales are rising.
- Inventory mismanagement: Having too much slow-moving inventory can be a costly asset, while running out of inventory can decrease sales, both of which are warning signs.
- Increased debt levels: Consistently rising debt is a strong indicator of a business struggling, especially if rising interest rates cause cash flow issues.
Operating a small business is challenging, no matter the business climate. It’s crucial to have a firm financial grasp on your company and its financials so you’re able to analyze issues and pivot quickly when appropriate. Doing so will keep your business moving forward and poised for long-term success. In this article, I’ll cover a few of the most important financial warning signs for small businesses.
Decreased Profit Margins
One of the earliest signs of financial trouble in small businesses is decreased profit margins. Many business owners equate their business success with sales. However, if profit margins are not holding steady or increasing, their business may not be succeeding like they believe it is, even if sales continue to rise. It’s important to break out the cost of goods sold in a small business’s accounting records so its gross profit percentage can be closely monitored. A decreasing gross profit percentage is one of the earliest warning signs for a small business. Luckily, if this is closely monitored, actions can be taken to help increase the gross profit percentage and overall health of the business. This is also another example of how up-to-date accounting records can help a business owner with decision-making.
Inventory Mismanagement
Another financial red flag for entrepreneurs is inventory mismanagement. Inventory can be a costly asset, especially as interest rates rise. It’s crucial to have the correct amount of inventory on hand, and it can be a key warning sign if not. If select inventory is moving slowly, it’s important to analyze whether that’s a product worth selling. On the contrary, if inventory is consistently running out and therefore decreasing sales, it’s important to pivot your business to where demand is highest. Observing inventory patterns can provide an early sign as to demand and the overall best direction for your business. The proper management of inventory can give you a competitive advantage over your competition and be a key indicator or warning for your business’s success.
Increased Debt Levels
Increased levels of debt are another financial warning that small businesses shouldn’t ignore. Debt can be an important tool for business growth, but it must be monitored closely. Consistently rising debt levels are a strong indicator that a business is struggling, and action may need to be taken. This can be especially crippling to a business if interest levels rise unexpectedly. Rising interest rates and debt payments can cause cash flow issues that small businesses may not be able to recover from. Overall, increased debt should be monitored closely by small business owners because it’s an early warning sign of business failure.
Decreasing Sales and Tax Compliance Issues
Lastly, decreasing sales and tax compliance issues are crucial small business financial health indicators. Decreasing sales volume, while seemingly obvious, is still a strong financial warning sign that shouldn’t be ignored. In addition, tax compliance issues can be a financial warning because they can spiral into penalties, interest, and additional compliance costs. Although the additional cost of penalties and interest may seem small at first, they can quickly grow depending on the circumstances. Monitoring sales and tax compliance allows small business owners to identify issues and make corrections before they become uncontrollable. Proactive attention to these 5 financial warning signs can be the difference between success and failure for small businesses, especially during a rapidly changing business environment.
Small Business Accountants in the Lehigh Valley
To stay on top of the warning signs your small business may be facing, contact Molinari Oswald LLC for small business accounting services.
