Spot the Warning Signs 🚩in your Financial Statements

There are two key data categories to consider:

1. Statement of earnings;
2. Balance sheet.

Naturally, your accountant can help you to read and understand these sections. Here is what you should bear in mind.

Statement of earnings

Your statement of earnings outlines your company’s profitability. It shows what your business earned and what it spent during the year.

• Decline in revenue: If your business experienced a decline in revenue over the past year, this could be an indicator of financial difficulties. You should find out what is behind this decline. Is the situation temporary or permanent? The answer to this question will allow you to determine whether spending rationalization measures must be taken or if you should consider repositioning the company.

• Increased operating expenses: Has your spending increased significantly? You should find out what’s behind this. Did you have an exceptional year or is the increase here to stay? As mentioned above, if your revenue doesn’t increase in line with your expenses, this is a red flag. A liquidity crisis could be on the horizon and action must be taken quickly.

• Decreased gross margin: If your gross margin has decreased, this means that each dollar of sales is less profitable compared to the previous year. You must act quickly and adjust your sale price (by taking into account the purchase price of materials and other elements, including labour).

• Net losses: Net losses are calculated by subtracting your expenses from your revenue. If your company operates at a loss year after year and experiences a decline in revenue, you must consider whether it is sustainable over the long term. The reasons behind these losses should be investigated and corrected.

• Irregular earnings: si vous avez des bénéfices irréguliers, mais que vous n’arrivez pas à savoir si cela est une tendance et qu’elle se maintiendra dans les années à venir, vous devriez pousser un peu plus loin l’examen. Il est important de comprendre les raisons de l’irrégularité de vos bénéfices. Sont-ils liés à une perte de contrôle de vos revenus et de vos dépenses ?

Balance sheet

Your balance sheet is a snapshot of your company’s financial situation at a point in time. It shows what you own (your assets) and what you owe your creditors (your liabilities).

• High debt levels: When your company has more loans than assets, there is a real risk of not being able to reimburse your creditors should you close your business. If you have secured several loans, this could negatively impact your personal financial situation.

• Negative equity: This means that your company incurred losses in recent years or that you withdrew too much money in the form of dividend payments in particular. In such a situation, you may have difficulty securing financing from traditional financial institutions. Therefore, you should monitor this element.

• Increased accounts receivable: You must monitor the age of your accounts receivable. The older they are, the greater the risk of not receiving payment. Naturally, this also depends on the activity sector in which you operate and your company’s growth cycle.

• High inventory levels: This can also impact your company’s liquidity. High inventory levels may also be caused by stock that hasn’t found any takers. An analysis of your inventory components may be necessary to identify any problematic items. Assessing the inventory age could also be an important indicator.

• Short-term debt: This is debt that is not necessarily financed by a banking institution. Ideally, a business should finance its ongoing operations from current liabilities, while investments in equipment and other long-term assets should be financed from long-term debt. You should always bear in mind that you’ll require liquidity over the next 12 months to cover your short-term debts.

In a nutshell, if you spot a combination of these warning signs while reviewing your financial statements, you must take action! To prevent the situation from escalating, you should quickly call on an expert such as a Licensed Insolvency Trustee. They will analyze your financial situation and propose a recovery plan and other solutions.