5 Bookkeeping Red Flags for Small Business Owners

A small business’s financials are crucial in assessing the health of a company. As the old adage says, “numbers don’t lie.” Numbers can indicate success or failure in a company, and they can certainly indicate the first signs of trouble within a company. As a small business owner if you do not know how to interpret your bookkeeping records, it is critical you hire outsourced bookkeeping services for small businesses to assist you.

As a small business owner in today’s highly competitive economic climate, it’s vitally important to make sure your company’s financial records stay up to date. Proper bookkeeping and accounting provide important clues about the monetary health of your small business. Some of these clues serve as financial warning signs that your business could be in trouble. Having reliable, timely, and systematic accounting, bookkeeping, and financial management operations contribute to the success of a business. Outsourced bookkeeping services for small businesses may be the solution for your company if you are experiencing any of the following warning signs.

1.Rising debt-to-equity ratio:

According to Investopedia, the debt-to-equity ratio is used to evaluate a company’s financial leverage. It is a measure of the degree to which a company is financing its operations through debt versus wholly owned funds.

Given that the debt-to-equity ratio measures a company’s debt relative to the value of its net assets, it is most often used to gauge the extent to which a company is taking on debt as a means of leveraging its assets. A high debt/equity ratio is often associated with high risk and means that a company has been aggressive in financing its growth with debt. A red flag should be raised if the debt-to-equity ratio is over 100%. Consult with your local CPA if you are unsure of your debt-to-equity ratio and its meaning.

2. Low Current Ratio

According to Investopedia, The current ratio is a liquidity ratio that measures a company’s ability to pay short-term obligations or those due within one year. It tells investors and analysts how a company can maximize the current assets on its balance sheet to satisfy its current debt and other payables. This is calculated by dividing current assets by current liabilities.

A company with a current ratio less than one does not, in many cases, have the capital on hand to meet its short-term obligations if they were all due at once, while a current ratio greater than one indicates the company has the financial resources to remain solvent in the short-term.

3. Rising Accounts Receivables

A balance sheet that’s heavy on the accounts receivable is a double-edged sword. A thick stack of customer invoices is a good thing for any business because it indicates that sales are booming. On the other hand, it’s an indicator that a large portion of your company’s profits is tied up in unpaid customer invoices. Outstanding accounts receivable become a problem if invoices remain unpaid for an extended period of time.

Customer invoices are a promise of revenue, but they are not revenue in and of themselves. The longer your receivables remain uncollected, the greater the likelihood they’ll become uncollectible and will have to be written off as bad debt.  When you have an accounts receivable balance that consistently grows, it usually means one (or more) of the following:

• Your customer base, number of sales, or average sale value is growing

• Your credit policies need to be less lenient

Your business needs to find a way to efficiently collect money from clients

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4. Increasing Inventory Levels

For businesses that have inventory, it is important to understand that the more money you have tied up in inventory, the less you have on hand to deal with short-term debt obligations or unexpected expenses that often pop up while running a small business. There must be a reason why this inventory isn’t selling; either the product has become outdated, or the product has been damaged in some way.

Companies often prevent excess inventory from becoming a liability by offering discounts. While it’s important to have enough inventory to fulfill orders, a company doesn’t want to have a significant portion of its revenue sitting unsold in a warehouse.

5. Decreasing Gross Profit Margin

Investopedia describes gross profit margin as the metric used to assess a company’s financial health and business model by revealing the amount of money left over from sales after deducting the cost of goods sold. Without an adequate gross margin, a company cannot pay for its operating expenses. In general, a company’s gross profit margin should be stable unless there have been changes to the company’s business model.

6. Unsteady Cash Flow

Is your small business profit-rich, but cash-poor? If your financial statements show you’re turning a profit but your bank account indicates otherwise, it might be time to take a closer look at your cash flow. Poor cash flow is the reason 82% of small businesses fail. Some of the most widespread business cash drains include:

• unmanageable overhead expenses,

• unsustainable debt loads, and

• uncollected accounts receivable

Some cash flow issues are temporary and are related to seasonal slowdowns or other external factors.  It’s essential to take the proper steps so that your business has access to the positive cash flow it needs to make payroll and to pay immediate bills.

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Although some companies still rely on internal bookkeepers to keep their books and records, a large number of businesses have turned to a more cost-effective solution to manage their bookkeeping through outsourcing. Outsourced bookkeeping services for small businesses can eliminate problems that are created by resignations, retirement, and illness which are inevitable with in-house employees. From accounts receivable to checkbook reconciliation, outsource it all at a fraction of the cost of hiring an internal bookkeeper.

Additionally, Limitless Investment and Capital offers an unlimited transaction bookkeeping package with access to a FREE financial controller. This is an amazing solution for small businesses looking to grow. Get in touch to learn more.