If investors neglect their insightful role in monitoring their clients’ financial activities, they could be met with the shocking news of bankruptcy. An investor who doesn’t want to see his/her financial contributions diminishing in the hands of clients should remain watchful on how the clients are running their businesses. Failure to be alert about the progress of your client’s activities could see your investments run into financial hardship.
Bankruptcy isn’t a new thing in business, but a careful investor should stay ahead of the game to realize that the client’s business operations are facing challenges. Like other activities, the culmination of the bankruptcy situation cannot happen without showing visible earlier signs.
Here are the signs that your client is quickly running the investments into bankruptcy;
- Switching of auditors
It’s a requirement that all companies should have external accounting firms to audit books. While switching auditing firms is common. External auditors have crucial roles. However, it should concern an investor when the trend frequently happens without clear reasons. The switching of auditors is always never a good sign because in most cases, it signifies the disagreements in books of revenue.
When you see the behavior is on the rise, it’s worth treating it as a red flag because it can depict conflicts among a firm’s executive members.
- A massive insider selling
In most cases, companies resort to their savings to avert incidences of a financial crisis. It’s a tradition that the executives often hold large volumes of shares of their respective firms. It should worry you when the same executives begin to dispose of their shares in colossal amounts.
The big inside share sales are undoubtedly a precursor of bad economic times ahead. Even though such sales usually happen, large transactions should send concerns, especially when they happen amidst the release of negative news. They should alert you that something isn’t going well behind closed doors.
- Dividend reduction
While it isn’t evident that reduction or elimination of dividends to stakeholders is a sign of imminent bankruptcy, the behavior often leads in that direction. When companies are experiencing financial troubles, bonuses are often the first items that are sacrificed. However, the decision to reduce dividends results typically in low stock prices. It isn’t a secret that lowering or eliminating dividend is a sign that tough times are ahead.
The dividends reduction may not necessarily mean that the company in question is due for bankruptcy. Therefore, you can find out more by doing thorough research on companies that filed for bankruptcy. There are databases online where you have access to individuals or companies filed in the U.S. Federal Bankruptcy courts. The records are updated regularly, and this means that you can always find the company that you doubt.
- The sale of flagship products
Companies have various ways of dealing with financial depressions, but it’s always a concern when you see them touch one of their most significant products. A good investor should always be alert to see if a company sells its major division to raise cash to rescue its financial woes. However, the sales of minor product lines shouldn’t send panic to you as they are part of programs that thriving businesses run.
As an investor, you should be cautious but read financial news to determine if your fear is real or only speculation. It’s also prudent to seek services of financial advisors before you make any perilous transactions.
- Top brass leadership defections
The mass exit of senior leaders from one firm to other companies is often an indication that things are moving downhill. It should concern you further if you see such executive roles are being taken by individuals who used to hold low ranks. Defections of the senior management team without replacement with personalities of their equal is an indication that the future wouldn’t be bright.
- Cutting of the perks
When a company starts to streamline the perks on the downside, it could be a sign that financial challenges are ongoing. If the cuts on the perks are deep but suddenly come, you can almost be sure that the company is experiencing economic turmoil that can result in bankruptcy. In tough times, companies tend to come up with sudden measures to cut down on perks such as health benefits and pension plans.
Sometimes a company can go to the extent of reducing the wages of employees immensely. During such periods, you may see workers who don’t welcome the downward perks’ review leave the company.
Investors should treat the six scenarios as ‘writing on the wall’ for businesses that are edging closer to filing for bankruptcy. However, sometimes such measures ensure that individual companies recover from tough economic situations even though it’s rare.
While sudden actions are extraordinary measures for the management to fix the dwindling fortunes of a business, it’s a flagship sign for investors to reconsider their plans. Reading financial news and annual prospectus regularly can help investors determine struggling companies that could be on their way to filing bankruptcy.
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