23 Signs of an Impending Business Failure

You’ve heard the old saying that 50% of all businesses fail within five years but that’s just a bland statistic and from my experience. It essentially has no meaning out of context. The businesses that don’t fail are the ones that:

  • Consistently execute a sound business plan
  • Consistently listen to their customers
  • Consistently solicit feedback from employees – even negative feedback – no, especially negative feedback
  • Consistently preserve their capital resources

There are a lot of other factors that lead to business success … and there a a lot of factors that portend disaster, bankruptcy, chargeoffs, and inexcusable failure. What should you be on the lookout for if you’re an employee at a company you feel is heading the wrong direction?

Signs of business failure23 Signs A Business Is About To Fail

No sales – without sales, any company is doomed. If your company is continually experiencing sales decreases, that’s a really bad sign.

No profit – a company that cannot seem to generate a profit truly is doomed. Profits are easily determined in public companies, but even in private companies you can usually get a sense of the profit situation. Just ask the right people the right questions at the right time … and don’t be fooled into thinking that a chain with 100 stores adds up the profits from each one – the corporate office spends money too and those numbers could be hidden (and usually ARE in my experience).

No differentiation from competition – if your company is really no different (or even worse?) in regards to the customer’s experience, why would a customer want to buy from you?

Expenses out of control – “It isn’t what you sell, son, it’s what you keep.” Word of advice from a serial entrepreneur I once worked for. Just because a business is generating gross profit (or even net profit), that isn’t always a sure sign the corporate executives aren’t spending it all and borrowing more.

Defections by management – if you see multiple higher level managers leaving the company, they probably know something they cannot share for confidentiality reasons.

Lack of positive references – word-of-mouth is the absolute BEST advertising any company can get. If no one has positive things to say about how you treat customers, about your company’s products, or the way it goes to market, how can it expect to survive?

A rise in inventory levels – a business with slowing sales will experience a rise in its inventory levels. Sometimes a company will institute a new ordering procedure and cause inventory levels to rise – it sometimes results in a cash crunch which can cause a whole set of problems on its own.

Company leaders stifle initiative – a company on the downturn will have leaders in place that have a chip on their shoulder, have very little experience, very little business knowledge, or otherwise throw a wet towel on anything that wasn’t their idea.

Management talks about growth but focuses on cost cutting – if leaders within a company are all talk and no action when it comes to growth, yet they’re no talk and all action when it comes to cutting expenses, particularly indiscriminate cost cutting (training, new products, new locations, etc), it could signal a severe cash crunch that could spell disaster.

Too much debt – a company taking on more and more debt is a company doomed. Keep a close eye (if you can) on your company’s debt-to-equity ratio. Anything over a 3.00 could signal an impending disaster.

A desire to put policy over profit … or people – bad companies will consistently trumpet the importance of policies (usually decided by lawyers or someone other than people on the front lines of the business). When those policies put customers at arms length, put employees on the defensive, or drain the profit from the company, nothing good will result. When bureaucratic procedures impede flexibility, the end could be on the horizon.

A bad board – a board of directors that won’t stand up to a CEO or other board members and do what’s best for the company long term is doomed. You typically see this situation in smaller companies that tend to use employees as the primary source for their board members. If a board member can be fired, why would anyone think he would speak his mind on an issue where he disagreed with the CEO, his boss, or another board member?

No budget meetings – just like in your personal life, any company that doesn’t set a budget is probably headed for failure.

Repeated visits from lawyers, accountants, or auditors – never a good sign. No explanation needed.

Cancelled orders – companies that are in dire financial straits will cancel orders left and right, sometimes damaging relationships with suppliers. Alternately, a doomed company may consistently order the wrong merchandise at the wrong time and inflate its inventory beyond its ability to pay suppliers on time.

Sales of assets – a company in trouble will sell or spin off even well performing divisions in an effort to stave off bankruptcy.

Closing stores or divisions – a company that closes divisions or business units that produce positive cash flow or even those that are technically breaking even, may be experiencing cash flow problems that could predict a business failure. Remember that on a profit and loss statement, many “expenses” are only on paper – so why close this type of operation?

Employee morale in the gutter – if the people on the front lines are angry, disgusted, disillusioned, or disappointed, those feelings are easily communicated to customers … and no one wants to do business with angry, disgusted, disillusioned or disappointed employees.

Poor cash flow – since sales are the lifeblood of any business it’s only because they bring in cash. Failing businesses are inept at handling the little cash they DO bring in and waste it on silly projects designed to make things “look” better.

Employees spend too much time on busywork – companies that constantly have their front-line employees doing things that don’t have a measurable positive impact on the customer or the customer’s experience are wasting resources. Failing companies consistently waste resources.

Meetings, meetings, meetings – if there are a LOT of closed door meetings among the higher ups AND you already have the sense that the business is struggling, those meetings aren’t to celebrate successes. They’re to work out contingency plans for the executives.

Too few meetings – if your boss and your boss’ boss suddenly don’t talk about the future, stop having those quarterly meetings, or otherwise clam up, they may fear tipping their hand. So they don’t talk to anyone at all.

Cut off from vendors – if no one will sell your company on net 30 credit terms, that’s a REALLY bad sign (unless you’re a new company then it’s quite normal).

Any one of these “signs” by themselves isn’t always a prediction of business failure, but take several of them together and it definitely could be. If you see your own company in this article, dust off you’re resume, order your copy of The Inner View of Your Interview, and start looking for another company to work for. It’s always easier to get a job if you’re employed so start looking now!