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Balance Sheet

  1. High Inventory Rate Vs Low Sales

When a high inventory rate is recorded, it means the turnaround of the stock is fast to produce the finished goods. However, it does not make sense with a high inventory rate but a registered low sales volume. Leakage in the supply chain could likely be one of the reasons.

 

  1. High Loan Amount to Directors

When excessive amounts of loan to the director(s) are recorded, lenders view this as the company is not using its cash inappropriate manner, or directors are misusing company funds or moving cash out of the company.

 

  1. High Receivables Vs Unhealthy Aging

Trade receivables are acceptable if it falls within 1-2 months or within the industry credit terms offers to clients. However, a high percentage of receivables for more than 4 months is showing signs of an unhealthy collection pattern.   

 

Cash Flow Statement

It is inaccurate to conclude that the total cash collected is the same as total revenue for the accounting period unless your business is based on hard cash received upon issuance of invoices in the same accounting period. 

 

  1. Cash paid out to questionable investment.

Cash has been paid out to invest in companies where directors have personal interests, for purchase of assets/properties/stock in individual names or assets which has no relation to the generation income for the company.

  

  1. High Revenue vs Low inflow of Cash

Such situations exist when a company has made lots of sales by issuing invoices but cash from sales is yet to be collected. Any uncollected cash from concluded sales of more than 6 months should require the attention of key executives.   

 

  1. High Paid Out to Directors/Key Management Vs Low cash for Business Operation

It is acceptable to pay out good remuneration but not when the business is facing tight cash-flow to pay the expenses of the business.  

 

As mentioned, this is not an exhaustive list. There are many other observations in financial statements that would benefit business owners. I hope the above 9 Red Flags help in your strategy to excel in your business or new startups. Don’t forget to follow me on my next article to get some insights on Red Flags revealed in Operation Process. 

Having Good Corporate Governance or Lack of it can make or break a business.

I am writing a series of short articles on how business owners can influence and improve business performance by adopting positive Corporate Governance. Adopting good corporate governance in their business can increase reliability and trust among suppliers, banks, investors, and customers.

 

This series will concentrate on the business environment of Startups and Small Medium Enterprises where most owners-managers are the key persons in managing their companies. In cases where the owners employ staff to take charge of the business’s day-to-day operation, these business owners will still heavily rely on themselves to make strategic business and important financial decisions to sustain the business’s longevity.

 

The Chartered Governance Institute defines corporate governance as the system of rules, practices, and processes by which a company is directed and controlled. In a nutshell, corporate governance refers to how a company governs itself, includes but not limited to who the decision-makers are internal approval structure, payment control processes, transparency & accountability, proper legal & financial documentation, and appropriate financial decisions.

 

Good corporate governance contributes to cash flow management in a positive manner. Cash flow is the main blood of a business. A business’s success depends on how companies source, allocate, use, and manage their funds. Good corporate governance minimizes waste of resources, curbs mismanagement, and reduces financial risk and corruption.

 

In my next article, I will explore how financial statements can reveal a business’s health and how investors/banks can read what is hidden behind the numbers. Stay tuned for my next article.

Writer: Alycia Lee Mie Sin