Is Your Company Next?

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According to the Department of Labor, more than five million workers have lost their jobs since December 2007.    In March, the unemployment rate hit 8.5% and economists expect that number to rise in the upcoming months.    In fact, many companies are in the middle of a major business restructure and possible layoffs.   How can you tell if your company is next?    How can you tell if your job is in jeopardy?  

If you work for a fairly small business, the pace of activity is a good indication.   You can tell when orders go down or there are fewer customers.  But if you work for a large corporation, put office gossip and your fears aside, and look at your company’s financial statements.   Accounting is a language of business for a good reason.   It can give you a fairly good idea of company’s financial health.   If it’s a publicly-traded company, your company is required to file financial statements on quarterly basis and you can access these figures on a company’s website or SEC website.   Here are some red flags to look for:

Revenues, Profits or Sales

Revenue or the sales the company received from its business activities is a very important factor.  Look at the change in revenue from year to year or for a more detailed picture look at the figures on a quarter-to-quarter basis.   Most likely variations within 10% are normal.  However, if it’s 30% or more, it is pretty substantial.  In other words, more than 30% is enough so that employees should be concerned about their jobs.  

Net Income

The company’s bottom line is the company’s net income from operations.    If it’s close to zero, the company is operating very close to “break-even,” or its expenses are roughly equal to its revenue and little to no profit is being made.    That puts the company in a somewhat cautions situation.   If it would lose a big order or experience less demand overall for its products, it would create a further drop in revenue.   A further drop in revenue could push company in dangerous territory.    When you look at the financial statements and see brackets around the net income figures, it means that the company is already losing money.   This is not a good sign. 

Cash Flow or Cash Reserves

If company is operating at loss, it usually taps into its cash reserves to survive.   But if the company doesn’t have a cash reserve, then it may have to rely on credit to pay the bills.   Look if the creditors are tightening their lending standards for your company.    As a result, many credit-reliant businesses are struggling to make payroll.  In turn, that forces them to cut down their work force or close their operations altogether. 

To find out how much cash your company makes or lacks, look at its cash flow statement.   It breaks down the cash a company earns from operating activities, investing and through financing.  Next, compare the numbers for several consecutive quarters.  Two consecutive quarters in which more than half of cash reserves are burned would be an indicator of real trouble. (For cyclical businesses, a year-over-year comparison may paint a more accurate picture.)

Bond Ratings

Bond ratings, issued by rating agencies like Standard & Poor’s, Moody’s and Fitch Ratings, show how likely a company is to pay back its debt obligations.   In a way, bond ratings reflect a company’s long-term viability.   There could be many reasons why a company gets downgraded and these reasons may not necessarily affect its employees directly.   But a downgrade isn’t a good sign for the company’s overall financial health.  You can check out a company’s rating at each of the ratings agencies’ web sites.

 

Anna Timone (195 Posts)


Comments

  1. Thanks Anna for making excellent analysis and it is very helpful indeed. Besides the revenue items, I want to bring out one balance sheet item that might be useful too. The debt ratio, which is debts compared to capital, could be interesting . If the debt ratio was high, the company would have to pay for high interest expenses and thus would tighten its revenue and cash flow. High debt ratio also implies that the company has difficulties in raising further debts from banks. Shareholders are unwilling to contribute extra capital into the company due to risk concern. Credit agency might lower its credit rating and the company would have difficulties in issuing bonds The main reason why GM filing for bankruptcy was due to its debts exceeded capitals.

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