Causes of Financial Difficulty for Business
The root causes of a financial crisis will often depend upon the unique situation of each business; however, some of the more common causes are:
- Under-capitalization: This means there was not sufficient money to pay for the expenses and inventory of the business while sales were building and accounts receivable were being collected. Under-financed businesses often do not realize their potential because of the inability to properly invest in inventory, equipment, marketing and sales initiatives.
- Operating Losses: If a business has been incurring losses it may use loans and other sources of credit to fund the losses and create cash flow. The resulting increase in accounts payable and source deductions or HST/GST amounts due will ultimately strain the financial viability of the business unless it quickly becomes profitable.
- Loss of a significant contract or customer: Often fixed expenses cannot be reduced quickly enough to compensate for the diminished cash flow when a significant customer or contract is lost.
- Significant change in the business environment: Such things as a competitor entering your industry or introducing new technology, trade barriers being erected by foreign jurisdictions you trade with or new laws controlling your business, can adversely affect profitability.
Sometimes these changes do not have an immediate impact, but a financial crisis looms unless the situation is corrected. When cash flow diminishes, some of the more common symptoms of an impending financial crisis become apparent:
- The bank refuses to honour cheques.
- Canada Revenue Agency sends third party demands to your customers and/or freezes the business's bank account.
- Creditors begin to take legal action resulting in judgments.
- Secured creditors and lessors initiate steps to seize their collateral.
- Your bank or other secured creditor sends you a demand for repayment.
- An unsecured creditor threatens to place you into bankruptcy.
Timing is important: The sooner you address the financial problem the more options you will have available and the greater your chances of recovery. Even in a critical situation you may have options.
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