Keep A Look Out For These Red Flags Washington DC

In more than 20 years of working with contractors in the various trades, I have seen a lot of once profitable companies go out of business. Business failure is not an overnight occurrence. It is gradual—often taking three to four years—and most don't even realize they are in trouble. Until it's too late.

This month I want to discuss some red flags that may indicate you and your business is in peril, without realizing it. As you review the danger signs below, ask yourself "Is that me? Am I in that situation?" If so, you may be in trouble. If some of these red flags apply to your business, it's time to make some changes.

Danger signs ahead

There are a host of indications that occur to tell you whether your business faces difficulties. Being able to identify them can be the difference between overcoming them and going out of business. Here are some of the more common tell-tale signs:

• Are you paying yourself a regular and reasonable salary (from the current income and not from borrowed funds)? If you are unable to draw a reasonable salary from the business, on a regular basis, that is a danger sign. It may simply be a pricing problem, or receivables problem, but take it as a red flag and find out what is going on.
• Is your line of credit growing? A line of credit is designed for one purpose and one purpose only: to be used for short-term borrowing against receivables. If that is actually how it's being used, your line of credit will reduce to zero at least once or twice a year. If, however, your total line of credit is constantly growing, this too is a red flag.
• Are you able to pay for new vehicles with cash? Equipment replacement costs are typically the second highest cost of doing business. When products and services are properly priced, funds will be available to pay for new equipment—with cash. If you are constantly finding yourself borrowing money when it is time to purchase a new piece of equipment, chances are you are not priced properly.
• Are you current with all your suppliers—especially your distributors (or are you using them as your bank)? Cash flow profit and losses only measure real dollars in and real dollars out. Increasing amounts of money owed to suppliers (payables) will not be reflected in the P&L statement. Use the balance owed your suppliers as a red flag. Healthy companies pay their suppliers on time the majority of the time. Unhealthy companies owe their suppliers increasing amounts of money.
• Are your taxes current? Unpaid taxes are not just a red flag, but are very serious and can cost a company owner money in penalties and interest--not to mention possible jail time. If you are not paying your taxes on time (payroll or personal), it is a GIANT red flag.
• Do you have real money left in your checkbook each month, meaning do you have real cash dollars in your checkbook after you have paid your salaries? When all of your bills are paid, your line of credit is at zero, you are paying yourself on a regular basis, money is put back for the replacement of equipment, you are current with your suppliers, and you still have money in your checkbook, you truly are profitable. Cash is a real truth teller. Your accountant, and/or accounting statement, may or may not tell you that you are profitable, but you can bet if all the things we have discussed are in proper order, your business is healthy!

If you recognize any of these signs, it's time to do something about them—NOW! It's easy to deceive yourself. We all do it. So, if you have one of the red flags, find out what the problem is and quickly!

For more information on Grandy & Associates, visit www.GrandyAssociates.com, or call at 800-432-7963.