Financial Health – So, you’ve been running a business for a while now. Things are moving, you’re getting customers, and you’ve got a team in place. But how do you know if your company is in financial trouble? It’s easy to miss the warning signs—trust me, I’ve been there. I’m sure we’ve all been a little too optimistic about a potential deal, or brushed off a “small” expense as no big deal. But if you don’t take the time to recognize the subtle red flags, it can spiral out of control. Here are six warning signs of poor financial health in companies that I’ve learned to spot over the years (and avoid when possible).
6 Warning Signs of Poor Financial Health in Companies
1. Consistent Cash Flow Problems
Cash flow is king. Without it, you’re basically running on fumes. There was a time in my business where I was always scrambling to make payroll, even though sales were decent. The issue? My cash flow was all over the place. One month, we’d land a big contract and I’d think, “We’re set!” Then, the next month, bills would pile up, and I realized I had spent too much too fast.
If you find yourself constantly chasing overdue payments or getting that sick feeling when it’s time to pay your suppliers, you might be facing cash flow issues. It’s critical to have a clear understanding of your incoming and outgoing cash every month. Keep a close eye on accounts receivable—if people aren’t paying on time, it can kill your liquidity. Consider using accounting software (like QuickBooks or Xero) that gives you real-time insights into your financials. I learned the hard way that letting cash flow issues slide only worsens over time.
2. Rising Debt Levels
Debt isn’t the worst thing in the world. But if you find yourself buried under mounting loans with no clear plan to pay them off, that’s a red flag. When I was first starting out, I took on some loans to cover growth, and I didn’t anticipate how quickly interest and repayment schedules would add up. Before I knew it, more of my revenue was going toward servicing debt rather than reinvesting in the business.
If your business is relying too much on debt to stay afloat, this is a sign that things are not as healthy as they should be. You should be able to generate enough income to cover your operating costs without constantly borrowing. If your debt-to-equity ratio is creeping up, it’s time to reassess your financial strategy.
3. Declining Profit Margins
This one is subtle but crucial. At first, it’s easy to chalk up a slight drop in margins as just a rough patch. But if you’re consistently seeing lower profits, it means that something deeper might be going wrong. Whether it’s rising production costs, shrinking customer spending, or even poor pricing strategy, you need to figure it out before it snowballs.
I remember a time when I kept thinking, “It’ll bounce back. Maybe next quarter.” But what I didn’t realize was that my margins were getting thinner every month, and I hadn’t adjusted my pricing model accordingly. The cost of raw materials went up, and instead of raising my prices slightly, I kept absorbing the difference. Bad move.
Track your profit margins consistently—ideally, monthly. If you notice a downward trend over a few months, it’s time to investigate your costs, your prices, and maybe even your target audience. Keep an eye on industry trends—if everyone’s margins are shrinking, it might not be your fault. But if your margins are dropping faster than your competitors, it’s time for a serious look at your business operations.
4. Excessive Inventory or Unused Assets
If you’ve got inventory piling up or equipment collecting dust in the corner, it’s a sign that your business isn’t running as efficiently as it could be. I once invested in a big batch of materials for a project that ended up falling through. They sat in the warehouse for months. The money tied up in that inventory could have been used for other things, like marketing or paying down debt.
Excessive inventory can be a drain on cash flow because you’re paying for it upfront, but it’s not earning you anything until it’s sold. Similarly, unused assets—whether it’s machinery, office space, or even software subscriptions—are just money down the drain. Conduct regular audits of your assets and inventory. Look for ways to sell off, repurpose, or get rid of things that aren’t adding value to your business.
5. Increased Employee Turnover or Low Morale
A thriving business depends on a motivated, dedicated team. When employees start leaving more frequently or seem disengaged, there’s something wrong with the financial health of the company. Low morale can result from all kinds of issues: cash flow problems, stagnating pay, lack of growth opportunities, or simply poor leadership.
I’ve had times where the financial stress of the business trickled down to my team. The pressure to make payroll led to cuts, which led to dissatisfaction. And that led to more turnover. It was a vicious cycle. Investing in your employees—fair pay, growth opportunities, a positive work culture—goes a long way in maintaining morale. It’s easy to underestimate how financial issues can impact your team, but when that happens, the entire company suffers.
6. Lack of Financial Planning or Strategy
This one can be sneaky because it’s often overlooked in the chaos of daily operations. Without a solid financial plan and strategy, it’s hard to predict where your business is headed. You need to be able to plan for taxes, expansion, contingencies, and even worst-case scenarios.
When I started out, I was so focused on getting customers in the door that I didn’t really have a concrete financial strategy. I didn’t plan for the slow season, and when revenue dropped, I was unprepared. That led to stress, panic, and, honestly, some bad decisions.
Having a financial plan isn’t just about keeping your books in order—it’s about forecasting and preparing for both opportunities and risks. Set aside time to do this regularly, even if it’s just for the next six months. Look at trends, set some realistic goals, and stick to them. You don’t need a complex spreadsheet, but a good sense of where your money’s going and where it should go next is invaluable.
There you have it—six warning signs that your company’s financial health could be in trouble. If any of these sound familiar, it might be time to dig a little deeper into your financials. The sooner you spot these issues, the easier it is to course-correct. Trust me, I’ve learned that the hard way. Keep your eyes open, stay proactive, and don’t be afraid to ask for help when needed. Your business deserves a strong foundation, and spotting these signs early can make all the difference in getting back on track.
