Appendix 3 Early Financial Warning Signs

A3-1

Balance Sheet 

 Failure to submit financial statements in a timely fashion

 Slowdown in the collection period for receivables

 Deterioration in customer’s cash position

 Share increases in dollar amounts or percentage of accounts

receivable

 Share increases in dollar amounts or percentage of inventory

 Slowdown in inventory turnover

 Decline in current assets as a percentage of total assets

 Deterioration of the liquidity/working capital position

 Marked changes in mix of trading assets

 Rapidly changing concentrations in fixed assets

 Large increase in reverses

 Concentrations in noncurrent assets, other than fixed assets

 High concentration of assets in intangibles

 Disproportionate increases in current debt

 Substantial increases in long-term debt

 Low equity relative to debt

 Significant changes in the structure of balance sheet

 Presence of debt due to/from officer/shareholders

 Qualified audit

 Change of accountants

Income Statement

 Declining sales/rapidly expanding sales

 Major gap between gross and net sales

 Rising cost percentages/narrowing margins

 Rising sales and falling profits

 Rising levels of bad debt losses

 Disproportionate increases in overhead, relative to sales

 Rising levels of total assets, relative to sales/profits

 Operating losses
A3-2

Early Financial Warning Signs

Receivables Aging 

 Extended average age of receivables

 Changes in credit policies

 Extended terms

 Replacement of accounts receivable with notes receivable

 Concentrations of sales

 Compromise of accounts receivable

 Receivables from affiliated companies

Early Management Warning Signals 

 Change in behavior/personal habits of key people

 Marital problems

 Change in attitude toward bank or banker, especially a seeming lack

of cooperation

 Failure to perform personal obligations

 Changes in management, ownership, or key personnel

 Illness or death of key personnel

 Inability to meet commitments on schedule

 Recurrence of problems presumed to have been solved

 Inability to plan

 Poor financial reporting and controls

 Fragmented functions

 Venturing into acquisitions, new business, new geographic area,

or new product line

 Desire and insistence to take business gambles and undue risk

 Unrealistic pricing of goods and services

 Neglect or discontinuance of profitable standard lines

 Delay in reacting to declining markets or economic conditions

 Lack of visible management succession

 One-person operations showing growth patterns that strain the 

capacity of the owner to manage and control

 Change in business, economy, or industry

 Labor problems

 Change in the nature of the company’s business

 Poor financial records and operating controls

 Inefficient layout of plant and equipment
A3-3

Early Financial Warning Signs

 Poor use of people

 Loss of key product lines, franchises, distribution rights, or sources 

of supply

 Loss of one or more major, financially secure customers

 Substantial jumps in size of single orders or contracts that would strain

existing productive capacity

 Speculative inventory purchases that are out of line with normal 

purchasing practices

 Poor maintenance of plant and equipment

 Deferred replacement of outmoded or inefficient equipment

 Evidence of stale inventory, large levels of inventory, or inappropriate

mix of inventory
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