There are some warning signs in business before trouble appears, but unless you’re actively looking for them, they can take you by surprise. Daniel Fitzpatrick writes.

In military training, they teach how to look out for warning signs that could affect the mission. They call this situational awareness. Potential threats might include the enemy’s position, the current environment, the shape they are in mentally/physically or position if things went wrong and what the next move would be.

This can also apply to trade businesses as there are always warning signs when your business is headed for trouble.

Having personally coached hundreds of trade businesses over the past twelve years, there are nine warning signs I look for. Deal with these early and chances of success improve dramatically but left too long they can cause major problems at best and failure at worst.

Early warning signs

These usually start small but will become bigger over time if not dealt with. So, tackle them early and your business will stay out of trouble further down the line.

1. Bank account is often at low tide

This is the one that everyone pays attention to. If I have money in the bank then I must be ok, right?

Not necessarily. If the bank account looks good but you’ve just taken some large deposits on jobs or there are supplier’s bills that have not been paid for yet. Then things will look better than they are.

If the bank account always seems to be low and you are constantly scrambling for money then that’s a bad sign.

2. Owners not getting paid

Not being able to pay yourself a regular wage as the owner. Time spent in the business either on the tools or organising should be costed into the jobs, so the money’s there. Too many trade business owners in early years are making less than if they were working for someone else. There should be enough for a wage and a healthy profit as well.

The same applies to your partner when they’re working in the business. If cash flow can’t support their wage, it’s a sign that they’re just not making enough for a sustainable business.

3. Confused by the numbers

The numbers you see must be accurate and checked at least monthly. It’s easy to fix one month but hard to fix twelve.

I still see a lot of tradies’ financials that show incorrect margins because wages are other direct costs are coded as expenses rather than direct costs.

If you are finding that your profit and loss shows large profits one month then big losses the next, even though not much else has changed in the business. It’s likely that you aren’t including ‘work in progress’ which takes into account deposits on jobs or costs incurred that can’t be billed yet.

Not watching the numbers or inaccurate figures is like flying a Boeing 747 with no instruments, while your copilot is yelling instructions as they are looking out the window. Dangerous!

4. Going in different directions

When the owners or the team are pulling in different directions. This could be owners being out of alignment on the big issues or a clash between management and staff.

I’m not talking about the odd disagreement here and there, that’s healthy and challenges wrong assumptions. But when there are core issues that can’t be resolved, deep-seated family disagreements or frustrated team members who are working against the company’s objectives, that’s a major sign that the business could be in trouble.

5. Discounting when things get quiet

If work is a little thin on the ground, it’s tempting to discount jobs to keep the team going. But how low is too low?

A mistake I see a lot is discounting to get that big job and then later discovering they have spent the past six months breaking even or losing money on it. Big jobs usually have a few surprises, and it doesn’t take long for extra hours to add up. A builder client I worked with told me at our first session he had completed a $800,000 job and made nothing of it. That doesn’t happen anymore.

Discounting margins to get the work combined with growth is a slippery slope. You won’t know how profitable the job was until the end, so a buffer is essential. Larger companies can lose a lot of money here and may not realise until it’s too late.

6. Collecting too many barnacles

If jobs are consistently taking longer than they should, this will be eating away at your margins. Or you have too many clients who keep complaining about the price trying to get something extra for nothing.

Like barnacles on the bottom of a boat. Left long enough they accumulate slowing momentum; over years they will also strip away the paint and water will erode the metal. Too many barnacles will do this to your business too.

Late warning signs

Late warning signs are much harder to fix. At this point, the business is in intensive care and requires immediate intervention to survive.

Cashflow will be bad and its likely losses have been accumulating for years, at this stage, time is running out.

7. Constantly being chased by suppliers

Suppliers are chasing for money that is significantly overdue and some have put the business on stop credit. Your front desk is hesitant to answer the phone in case it’s another creditor asking for money they haven’t got. Payment arrangements get made and then broken losing further credibility.

Paying for old jobs with new money from current jobs. Robbing Peter to pay Paul, whoever is yelling the loudest might get something. Jobs are constantly delayed as materials aren’t available to finish the work.

8. Employees not getting paid on time

Not enough money for wages some weeks, pay runs are being delayed. Lots of mistakes and callbacks on jobs as employees are no longer invested. At this point, the team has lost confidence in the business and is likely applying for more secure jobs. Some have already left and there is a lot of talk around town that the business is in trouble.

9. Legal

Owing a lot of overdue money to suppliers and the ATO. One or more creditors have lost patience and have taken legal action against the company to get paid. Costs are accumulating and lawyers are heavily involved adding even more expense.

The reality is that at some stage every trade business will experience some of the early warning signs in their business. This could be working through a small cash flow issue with a supplier extending payment terms or making an arrangement with the ATO to pay the GST this month.

But if there is a cluster of these signs, or they’re happening often, act early. They’re much easier to fix now than later.

Even at these late stages, the business can sometimes be turned around, depending on how big the deficit is and if there is enough profitable work to trade out of it.

However, this often involves convincing lawyers, creditors, staff and the ATO to back your plan which can be a tough sell. I have coached companies who have traded out of these final stages, but sometimes it’s just too late, the hole is too big. Better to deal with the warning signs early, it’s way less stressful and has much better odds of success.