Unfortunately some businesses will fail. There can be any number of contributing reasons, such as an economic downturn, competition, bad customer relations, bad internal management, changes in markets, government regulations or unforeseen events.
Even so, there are a number of warning signs that could signal the business is in trouble, says Jerry Lupkowski, a senior partner with MNP at its Portage la Prairie, Man. office.
Lack of profitability
It’s easy to blame the weather, market conditions or a long list of other factors for a poor month or quarter, but if the business is consistently underperforming from where traditional averages have been, it’s important to look for the real reasons why.
Early warning signs to look for on your income statement include a shrinking gross profit. Given the nature of agriculture, it’s natural that there will be some movement up and down, but ask your accountant or financial adviser where you stack up against other farmers with similar operations. Are your margins similar to the rest of the industry?
More bad debts
If the business is seeing an increase in bad debts, chances are it’s going in the wrong direction.
Loss of customers
This could be a product issue — for example with crop quality or livestock health — or a customer relations issue. The business is only as good as its customers think it is. The day they leave is the day it’s done.
Cash flow problems
If the farm business is borrowing to pay the hydro bill, that’s an early warning sign that all is not well. So is a buildup of unpaid statutory creditors, so if the business didn’t pay this month’s payroll remittance or GST payment, if it’s been pushed off to the next month, that’s a situation that needs to be addressed. Remember, directors of a corporation are personally liable for payment of these types of unpaid expenses.
More old receivables
If you have a lot of receivables over 90 days, why aren’t your customers paying you? Do you ever ask a new customer to see their balance sheet, or do you ever do a credit check on them? Can they afford what they are buying from you? What if they don’t pay? Can you afford it? Never hesitate to ask for invoices to be paid on time, and if you have to provide an incentive — such as a discount — to collect what’s owed, that’s sometimes what you have to do.
Loss of key employees
A key employee may see the handwriting on the wall long before it’s obvious to the business owner, and they may decide to jump ship. Communication is key. Identify problems and discuss them to help the farm or business retain the valuable people it needs.
There are ways to address a lack of management skills, such as through training or mentoring, but the mismanagement of assets is harder to deal with. The business owner must know where the money is going and what the outstanding liabilities are at any given point. If the owner is also a director, he or she could end up being responsible for certain unpaid liabilities such as payroll deductions, GST or PST.
If the business is being sued by customers, creditors, employees, unpaid suppliers, or financial institutions, it’s a strong indication that the business is not on track. In such situations, it’s best to react early rather than later, and to take measures to protect personal and business assets.
Bad employee relations
This can refer to employee-employer relations or to relationships between business partners. Employees have rights that protect them from discrimination, harassment and unfair dismissal, so business owners must ensure they treat employees with respect. At the same time, employees must understand they are representatives of the business during the hours they are employed, whether they are on or off the farm, and they should act accordingly.
Friction among partners
If the business partners aren’t getting along, it’s time to take a hard look. Take it as a sign that you need to think about how you and your partners can go your separate ways without adversely affecting your core farm business. If you don’t begin looking at the alternatives, don’t be surprised when you find out that your partners already are.