I have worked with 100′s of small businesses and have seen a few things that cause financial problems for them. I think they are very similar to individuals who have problems.
First, some businesses take much more personal compensation than the business can support. Sometime they do this to avoid corporate income taxes but do not tuck it away for liquidity when they need it. Individuals are doing something similar if they spend too much of their money on unnecessary things that are financed by some cash but more debt.
Second, some businesses have too many family members on the payroll and when times get tough have difficulty reacting. Individuals have this problem by spending more than they can afford to give their children all the things they want, rather than they can afford. “But is for the children”
Businesses may buy real estate above their needs in the interest of building equity for retirement rather than considering the costs for the business and the risks of long term debt. Individuals sometimes stretch for a house loan as they believe their income will go up and they can grow into a new mortgage.
Business sometimes are lax on their accounting procedures and financial reporting. They may ignore that information until it is too late. Individuals may have no clue to their financial position at all.
Businesses may borrow as much as they can by leveraging every asset they have to do so. Some make it doing this, but only if they are very profitable and reduce the debt over time. Banks don’t like permanent working capital loans. Individuals do it by over extending credit cards to the point where they are perpetual.
Business may ignore what is happening to demand for their product and continue to believe they can sell what they have. Individuals may not see changes in the market for their skills and do not invest in learning others before it is too late.
Businesses may become complacent with a high concentration with one customer. When that customer goes away, they scramble to replace it. Individuals do the same by trusting that their employer will always have a place for them and don’t watch what is going on at work.
Many of these issues are considered warning flags by credit people in banking. When they occur they watch their loans more closely until the business proves they can make their decisions work. These are not just flags for bankers, businesses and individuals should also understand the risk of what they are doing in their decision making.
