1. Introduction

A business crisis could hit any business anytime. Nowadays you often hear that the number of the insolvencies is rising. Which reasons ever led to insolvency, it nevertheless, destroys workplaces and values which the companies have built.

Added to the destruction of values and workplaces, personal tragedies of the present owners and employees are also worth to mention.

That's why every business owner should recognize a businesses crisis as early as possible, to be able to master them well.

And the size of a business does not make the possibility of a crisis go away. No, in fact we have seen even big companies going down the tube.

2. Reasons for business crisis

The causes for business crisis are as varied as companies are running. Nevertheless, causes of business crisis could be categorized into different areas.

Reasons of a business crisis:
  • Industries and Structural Crises
  • Absence of competitive Products
  • Management Mistakes
  • Problems with the company succession
  • Missing of strategical and operational business planning
  • Missing or defective success control or continuing analyses
  • Defective expense/cost accounting
  • Average to badly motivated employees
  • Defective customer contact and complaint treatment
  • Bad procurement of information and analysis.

In most cases of a business crisis it could be assumed, that not only one of the above mentioned causes has been present, but a mix of some or all causes.

With a startup business, there are still causes that come to the above list, which entrepreneurs have to be aware of.

Reasons for a crisis of Startup Businesses:
  • Wrong financing
  • Information deficits
  • Qualification shortages
  • Absence of planning
  • Personnel problems
  • Wrong or missing market knowledge
  • Missing management experience
  • Nebular business ideas.

Especially under risk are businesses with less than EUR/USD 50,000 of equity, a sales volume/revenue of 0.6 to 1.0 Million EUR/USD as well as between 5 to 50 employees and a business age of 3 to 10 years.

However, actual developments showed that even older and much bigger companies could get into a crisis. Businesses of the aforesaid scale have an advantage that should not be underestimated, they are small and flexible.

3. Signs of crisis (crises / alarm signals)

The following typical mistakes in business development and management could lead to a crisis:

  • Dependence on one or few customers
  • wrong Strategy
  • Optimism and Engagement as a substitute of Controlling
  • Marketing is used on a random principle
  • Capital requirements for Startups are underestimated for the start phase and founders of new businesses mostly want a first class-commercial equipment from the beginning.

Difficulties are almost predictable. The following list could serve as a checklist of warning signals.

Markets

Information about the development and size of your markets are coming mostly from accidental customers and/or sales team conversations.

Basic conditions of your market are only known incompletely and you know your competitors only in coarse. The development of the markets of your most important customers are not known to you.

Strategy / Controlling
  • No formulated strategy available
  • For plannings measurable figures are not defined
  • Operational Strengths and Weaknesses are not known
  • it is possible only under considerable effort to know which product groups and customer groups achieve which sales volume and profitability.

Also, during the last 3 years no successful new product market launch was done.

Regular conversations with important customers concerning their contentment, requirements and future developments, do not take place.

You could not make a clear statement about the advantages of your business in comparison to your competition.

Financial Statement
  • Sales development stagnates or is falling
  • you sell less to regular customer or lose them completely
  • you do not know with how much customers you generate which sales volume
  • Dependence on big customers is not known to you, or is not determined
  • big and small customers are examined with the same intensity, independent of profitability.
  • to provide offers is very luxurious as they are hard to compile. The success rate is falling.
  • you can list your 10 most important customers with sales volume and gross margin only with very high effort.
  • your total expenses rises more than your sales growth
  • Cost increases are above usual price increases
  • Cost increases cannot be understood in detail. Estimated values are used for calculation of prices.
  • Price calculations are carried out on full costs basis. A regular control and if necessary change of the calculated prices does not take place.
  • the accountancy is not used as a controlling and information source
  • Lower price limits are not exactly known to you
  • economical evaluations are done only irregularly and not analyzed, or the evaluations do not return the business situation correctly.
  • contribution margins are not known
  • Profit development is negative
  • in spite of positive operating result it is not known to you which sub-areas gain profit or loss
Liquidity
  • your liquid cash goes back with stagnating / falling sales numbers
  • the accounts receivables are growing faster than the revenue
  • the share of overdue accounts receivables rises within the total accounts receivables
  • the accounts payables rise, in spite of constant monthly payments
  • Suppliers complain increasingly because of late payment or threaten with stop of delivery
Organization

Organizational structure and competences are not stated unambiguously, or changed often. An Organizational Chart is not available. Workflows are not documented, thus some work is done repeatedly and/or multiple times.

Decisions are all made by the management. To the employees and customers, products and scopes of the business are only little known.

High fluctuation among employees, and high employee illness rate (> 10%) are normal. Sinking motivation with the employees is noticeable.

In spite of an ERP-System employees must look in case of doubt to the archived documents over and over again.

Employees only receive information about the business development from news and newspapers, but not from the business management.

Beyond the above, the business management must have a certain business specialist knowledge (especially: Finance & Accounting) or has to take care that this knowledge is available in the business.

Thus every entrepreneur should know his revenue and costs structure and could understand the evaluations of his tax adviser and controller. Otherwise, the entrepreneur can not recognize whether something runs out of the norm.

Further signs for an already occurring or arising crisis are:
  • the company equity will have consumed by losses in the near future
  • the indebtedness stands in no relation to the profit strength (interest and repayment can not be done anymore)
  • Payables could only be paid under big difficulties (Attention: Insolvency is a bankruptcy reason in many jurisdictions!)
  • Deficits in the accountancy (too high fixed costs, no tough accounts receivables management, no overview about the financial situation, wrong calculation bases, and other)
  • not fully used capacities (outdated production sites, overdue efficiency measures, too many machines / staff, and other)
  • Human Resources (employee's qualifications not meeting companies needs, high fluctuation, etc)
  • no or unclear Marketing Concept (target groups not defined, trends not notable, etc)

A business don’t have to run badly to get into a crisis. Fast growing companies are at danger either. Thus the operational organization and the necessary capacities must grow in phases of the strong growth.

This itself is the biggest problem, because a capacity planning and capacity extension on the basis of rapidly changing figures is a challenge.

Over-capacities are built up fast which become visible only when the growth is suddenly lower.

There are always phases of consolidation, these should be used to analyze possible false developments and to initiate suitable countermeasures. Then you have to review the past and only then you could plan the future.

4. Measures in the crisis

Search for somebody, to assist you with your Accountancy and Controlling, who is able to adapt your controlling and delivers the really important data to you. As you see from the above, it's not about massive amounts of data.

Speak early with your bank as well as with bigger suppliers and explain your situation, the earlier the better. In most cases the crisis could be overcome by openness to all involved parties.

Use all alternatives to get capital into your business, but don't sell yourself. It would be better to improve your accounts receivables management to collect receivables faster.

Factoring is a way if you urgently need money. If you are in an overdraft position with your bank accounts, you my ask to refinance it into a long-term loan, this will lower your interest expenditures.

Perhaps, you have the possibility to gain capital from government grants, so that you could continue working with your company.

However, you should not count on the possibility to receive government grants, your business might not be eligible. Tighten the operational organization (order processing, customer care, etc).

Keep an eye on the solvency of your company, this is most important first. At the 2nd step the ability of competitiveness is important.

When you have secured these both conditions for the survival of your business, you could go to the 3rd step, the expansion or the gain of higher gross margins.

In real life these three will be switch back and forth anyway.

5. Actions to prevent crisis

Use a business ratio system which shows you the most important numbers of your business. The following ratios belong to the most important ones:

  • Equity Ratio (at least 20% and more)
  • Return on Sales (at least 3 to 5% and more)
  • Cash Flow Margin (at least 3 to 5% and more; but: must be higher than Return on Sales).

Furthermore, you should keep an eye on the following values:

  • Cash on Hand (must be at least at the height of the Payables due at short notice)
  • short-term and medium-term Payables
  • total of accounts receivables (money you lend your customer with long payment terms, you can not work, that means: the lower your receivables, the better for you)
  • Inventory  (money is often bound here too much)
  • Order Backlog and the time range this order backlog keeps your business alive (get this values in relation to your companies capacity, so you could see which capacity or order backlog you will need to survive)
Actions in or before a Crisis

Create an early warning system, with the above mentioned values and you have a starting point. Keep your system small and clear.

Look straight for early indicators (data showing trends before the accounting data comes into force).

The incoming orders are one of them. Do not blow up the Controlling needlessly. Pay attention to data which help you to manage your business.

You know these data mostly from your everyday work, you only need to bring this in a useful form.

Even if your business runs well, you should have everything under control in your company, because it could turn around fast.

Tolerate no negligence such as excuses like 'no time', 'it runs very well at the moment', 'I have everything in my head', 'my people will do it', etc.

You are the boss (or at least somebody who has relevant influence) and the one who mostly influence the destiny of your business. Go ahead with good example.

6. Conclusion

Now you have an overview about possible signs of a business crises. Do not take this article and it's meanings too seriously. But also do not pretend the danger is not there.

Just because in one month your sales volume is a little bit falling, does not mean you are on the way into a crisis.

Deviations in your numbers should always animate you to perform deeper analyses. And if the analyses brings nothing special to your attention, you should observe the analyzed positions during a longer period.

Should you get into a serious crisis and you may not see any alternatives to handle it, please look for professional consultancy. The earlier, the better.

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All the best and a lot’s of success.