Signs of a business crisis

1. Introduction

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

As a result, there are the personal tragedies of the business owners and employees, when a business goes bankrupt or needs to close for other reasons.

That’s why every business owner should recognize a business crisis as early as possible. Only if you are able to recognize a crisis early, you are able to overcome or prevent it.

But, the size of a business is not a solution to prevent a crisis. In fact, we have seen even big companies going down the tube.

2. Reasons for a business crisis

The causes for business crisis are as many as there are companies. Nonetheless, causes of business crisis could be categorized into various 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
  • Missing or faulty cash management.

In most cases of a business crisis, it could be assumed, that not only one of the above-mentioned causes was the reason for a crisis. Most of the time a mix of reasons or all of them are the cause of the crisis.

With startup businesses, there are even more 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,
  • sales volume/revenue of 0.6 to 1.0 Million EUR/USD as well as
  • between 5 and 50 employees and
  • a business age of 3 to 10 years.

However, 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 (the alarm signals)

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

  • Dependence on one or few customers
  • wrong Strategy
  • Optimism and Engagement as a substitute of Controlling
  • Marketing unplanned and done randomly
  • underestimated Capital Requirements for the start phase. Founders of new businesses may want first class-commercial equipment right from the beginning.

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


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

Knowledge about the basic conditions of your market are completely unknown. You know your competitors only in coarse. The development of the markets of your most important customers are unknown to you.

Strategy / Controlling
  • No formulated strategy available
  • For plannings measurable figures are undefined
  • Operational Strengths and Weaknesses are unknown
  • it is possible, with considerable effort, to know which product groups and/or customer groups contribute to your business sales volume and profitability.

Also, during the last 3 years, no new product had a successful market launch.

Regular conversations with significant customers concerning their satisfaction, 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 are stagnating or falling.
  • You sell less to regular customer or lose them completely.
  • You don’t know with how many customers you generate which sales volume.
  • Dependence on big customers is unknown, or is not determined
  • You serve big and small customers with the same intensity, independent of profitability.
  • To provide offers is very tedious 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 rise more than your sales growth.
  • Cost increases are above usual price increases.
  • Cost increases cannot be understood in detail.
  • You only use estimates for price calculation.
  • Price calculations are only available on a full cost basis. A regular control and if necessary any change of the calculated prices don’t take place.
  • Not using the Accounting as a controlling and information source.
  • You do not know the Lower price limits exactly.
  • Preparation of Economical evaluations happen on an irregular basis and are not reviewed, or the evaluations do not return the business situation correctly.
  • Contribution margins are unknown.
  • Profit development is negative.
  • In spite of positive operating result, it is unknown to you which sub-areas (products/services) contribute a profit or loss.
  • 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 you with stop of delivery

Organizational structure and competences are not unambiguously, or change often. An Organizational Chart is not available. As workflows are undocumented in your business, your employees have to do work twice or multiple times on the same transaction.

Decisions are all made by the management. Employees and customers, only know little about the products and scopes of the business.

High fluctuation among employees, and high employee illness rates (> 10%) are normal. Decreasing employee motivation is noticeable.

Employees must look at the archived documents over and over again instead of trusting the ERP-System.

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

Beyond the above, 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 cost structure and needs to 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 be consumed by losses in the near future
  • The indebtedness stands in no relation to the profit strength (interest and repayment of loans can’t 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 too. Hence, the operational organization and the necessary capacities must grow extremely fast in phases of strong growth. This rapid growth could be the biggest problem, as capacity planning and capacity extension on the basis of rapidly changing figures is a challenge.

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

There are always phases of consolidation, these phases should be used to analyze possible false developments and to initiate suitable countermeasures. Therefore, these phases of consolidation are the time for you to review the past and plan the future.

I guess that’s enough for now about the signs of a business crisis. Read the second part of the story in, “How to overcome or prevent a business crisis”.

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