Your company's financial statements and projections are valuable tools that can help you catch potential problems before they develop into more serious ones. When you look over your statements and projections, pay particular attention to the following potential issues.
Erratic Cash Flow
Managing cash flow effectively may help your business survive during economic downturns and can position it for future growth. Weak cash flow management, on the other hand, can prove fatal to your business.Red flags you need to watch out for include unusually low cash balances or higher-than-usual payables occurring without a corresponding rise in volume. Other cash flow red flags include late loan payments, restrictions on credit by lenders, and using long-term debt to finance your day-to-day operations.
Increasing Equipment Costs
Contractors need to examine what their equipment costs are likely to be in the next year and compare these projected costs with costs from past years. Equipment costs should include purchase price, loan interest and payments, insurance, maintenance, gas, tires, etc. If the cost of acquiring, operating, and maintaining equipment looks as if it might be considerably more next year than in the past, you'll need to develop an action plan to handle the added expenses.
Smaller and Declining Profit Margins
When anticipated profit margins are small to start with, there's not a lot of room for slippage. Contractors need to watch their gross profit margin on every project very carefully. If you find that your gross profit margin is falling from period to period, you may need to reexamine your labor or material costs or charge more for your work. Other profitability ratios, such as return on assets and return on equity, should also be reviewed carefully.
Rising General and Administrative ExpensesExpenses on rent and utilities are generally fixed and need to be held to reasonable limits. If your company has an erratic workload, these expenses may consume more of your profits during slower periods.
Higher administrative expenses without the volume to support them may require remedial action on your part to avert financial problems.
Rising Debt LevelsAny evidence of high levels of debt on your financial statements may mean your company is overleveraged and could experience trouble repaying debt without having to divert working capital away from projects you are currently working on.
If you identify one or more of these warning signs, it may be time to decide on a course of action to fix the problem.
Call Us, our firm would be happy to work with you and help you look for ways to reduce expenses and improve revenues.
"When anticipated profit margins are small to start with, there's not a lot of room for slippage."
