Leverage And Financial Factors - Vulnerable Signs

• Anything that grow rapidly;
• Diminishing margin of profitability regardless of how they are computed;
• Subsidiaries, affiliate, division, plants or other business segments or product lines that are or could be, a financial drag or the borrower's overall performance;
• Uncompetitive cost structure;
• Deviation from normal seasonal borrowing pattern;
• Change in the market value of equity in relation to book;
• Top-heavy fixed assets;
• Significant growth or decline in sales;
• Excessive inventories
• Change of auditors
• Delay in receipt of financial statements
• Imaginative accounting;
• Excessive dividends;
• Poor financial controls;
• Major sales of assets;
• Decline in inventory turnover;
  
• Built up in the ratio of receivables to sales;
• Unfunded cash requirements, including large current or near-term debt maturity and inability/delay in seasonal cleanup;
• Difficulty in raising debts or equity;
• Poor allocation of financial resources;
• Earnings growth with dilution of earning quality. Earnings can be inflated by inventory profits (which may not be real profits because of higher replacement costs). Allowances for doubtful accounts reduced without justifications;
• High leverage, not only financial but also operational - for example high fixed costs;
• Stretching payable;
• Decline in net working capital;
• Inability to finance outside the banking market;
• Slowness in trade;
• Violation of covenants or agreement - with creditors;and
• Downtrend in the ratio of retained earnings to total assets.
  

When you see these signs or maybe you are trying to create these signs, put that in mind, your business is not in the right track...and bankers could smell these easily..