5 Signs A Business Is Failing & What To Do
Defining business failure
Before we look at the warning signs a business is failing, we need to know what qualifies as business failure. Businesses usually fail as a result of terminal insolvency; that is, a state of financial distress whereby the company cannot pay its bills when they’re due or it has more liabilities than assets on its balance sheet.
However, there are many roads that can lead to this outcome. Being able to recognize the signs a business is failing early on provides the valuable opportunity to make changes and turn the company around.
Importance of recognizing symptoms of business failure
There are countless examples of businesses that were on a downward trajectory but recognized the signs, made changes, and turned things around to become a success.
One such example is Best Buy, which in 2012 was “going out of business…gradually” according to Forbes. The company was shutting all its Chinese locations and planning to close a further 50 stores in the US (an announcement that reduced its stock price by 8%). In late 2012, newly appointed CEO Joly pitched his turnaround plan, which was mostly based on cutting costs and focusing on online sales to improve profitability. Within 5 years, the company’s margins had expanded and Best Buy was consistently in the top 10% of the S&P 500 from a total shareholder return standpoint.
Another example of a failing business that turned itself around is the Marvel Entertainment Group, which faced declining revenue, steep losses, and a delisted stock in the late 1990s. In fact, the company ended up filing for bankruptcy. After licensing out its comic properties to other film studios, Marvel then launched an initiative to control its own films under the Marvel Studios banner. The move skyrocketed Marvel’s value to $400 million by 2003, and in 2009, Disney acquired the formerly failing business for $4 billion.
5 signs a business is failing
1. Decline in revenue
As a business owner, you’re likely to keep a close eye on revenue. A downward trend in revenue is clearly showing an issue with sales. This is most likely due to a lack of new customers, or loss of existing customers.
2. Financial distress
There are multiple ways in which a company might show financial distress and varying degrees of that distress, ranging from temporary cash flow issues to issues with creditors.
Signs a company is in financial trouble include:
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Inability to pay bills
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Cash flow issues
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Increasing costs
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Creditor problems
Learn more: When Should A Company File For Bankruptcy
3. Changes in market conditions
Blockbuster is a classic example of a company that wasn’t able to recognize that market conditions were changing and went out of business as a result. Signs to look out for include new competition, changing customer behavior, and industry disruption.
4. Management issues
Having the wrong people in an organization’s key roles can prove catastrophic for a business. Compaq, for example, was once the largest supplier of PC systems. However, after Eckhard Pfeiffer became CEO in 1991, the company bought Tandem and DEC, which diluted focus from their core target market and Compaq was never able to recover their market share.
Signs of a poorly managed company include:
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Staff turnover
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Lack of direction
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Reputational issues
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Bad reviews
5. Legal and regulatory problems
Governance, Risk and Compliance (GRC) has become a major area of concern for organizations around the world due to increasing regulatory pressures, globalization, digital disruption, and other factors.
Remember Toys R Us? The household name in toy retail entered administration in February 2018 after mounting up £15 million in unpaid taxes.
Signs of regulatory issues include:
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Lawsuits
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Tax problems
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Fines
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Government intervention
Turning around a failing business
Some strategies to consider when you identify that your business is failing are:
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Organizational restructure (see: How To Restructure A Small Business)
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Cost cutting
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Market re-evaluation
Learn more: Strategies For Business Survival During A Recession
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FAQ
How do you know if your business is failing?
The main signs of a failing business are declining revenue, financial distress, management issues, legal or compliance problems, unfavorable changes in the market.
What type of business fails the most?
LendingTree analyzed US Bureau of Labor Statistics data and found that the mining, quarrying, and oil and gas extraction industry sees the highest percentage of businesses fail in the first year.