Answer me one question without looking at your spreadsheets, CRM, or banking app: what is the exact amount of your working capital right at this moment? And how has that figure changed month-over-month for the last six months?
If you cannot name these numbers on the spot, I have bad news for you. The very fact of this ignorance indicates that your business is in the risk zone. The only good news is that bankruptcy rarely happens overnight. A business begins to suffocate long before the final curtain: small cash flow gaps start occurring, which are easy to cover at first, but gradually accumulate.
I will break down five warning signs that are visible in a company’s operations a year to a year and a half before a collapse.
The “Process Perfection” Trap During Falling Demand
According to CB Insights data, which is also cited by the U.S. Chamber of Commerce, about 35% of small business closures are due to the product lacking market need.
Read also
Warning Sign:
If over the last 12 months you have made no qualitative changes to your product, service, or promotional methods, you are in the risk zone.
The typical reaction of a high-achieving entrepreneur to declining sales is an attempt to fix the system: train salespeople, implement scripts, or step up advertising. This yields a temporary result, but it is dangerous because you turn a blind eye to the core question: “Why did everything work fine before without these tricks, and now it has stopped?” Endless overcomplication of processes only increases overhead costs and makes the company fragile.
A classic example of such a trap is the collapse of Kodak. Contrary to popular belief, Kodak did not ignore digital technology. On the contrary, they invented the first digital camera and invested billions of dollars in developing digital solutions.
Kodak’s real problem was not a lack of technology, but an attempt to squeeze digital imaging into its old business model—that is, selling cheap cameras and deriving the main profit from film, paper, and chemicals. Management viewed digital photos merely as a way to get people to print even more pictures. They perfected the processes around printing when the market was already moving toward online photo sharing. They failed to recognize that digital photography was not “improved film,” but a fundamentally different business with different margins.
What to Do:
Look at the bigger picture—what has changed in your niche? During COVID-19, a restaurant in Florida survived by introducing family takeout meals just in time. In my own business, we launched an AI transformation right on time when we realized that AI was capturing all of our audience’s attention.
Ignoring “Silent” Inflation
Even in stable economies, inflation runs at 2–5% per year. Your expenses for rent, energy, and suppliers inevitably grow.
Warning Sign:
You keep prices at the same level for years out of “love for the customer.”
Inflation quietly eats away at profits until you hit an insurmountable wall where not raising prices is no longer an option. However, a sharp price hike of 10–20% shocks the market and leads to the loss of loyal customers.
What to Do:
Price management is an ongoing function. You need to adjust prices smoothly on a monthly basis. Use strategies like downsizing (reducing package volume or weight) or rolling out new product lines to make the increase feel natural.
Absence of an Expense Control Function
Expenses have a natural tendency to grow unchecked due to employee cognitive biases—there is always a desire to improve or buy something.
What to Do:
A company must have a regular function that constantly reduces costs and analyzes the necessity of spending. The only thing that should be indexed is salary, as it is a fundamental expense that purchases results. Everything else must be constantly questioned; otherwise, overhead will outpace revenue even with growing turnover.
Outdated Financial Model
The business grows, but the model remains the same. There is a “growth tax”: when you have 10 people, you manage them manually. When you have 50, you need a layer of middle management, lawyers, and audits. If the financial model is not updated, it begins to depress operations—for example, by failing to allocate as much to advertising as the current development phase requires.
What to Do:
Constantly ask yourself: “Is our business model still viable?” It often turns out that customer segments that used to feed the company now bring only losses—you need to let them go.
The Owner Wears Too Many Hats
About 7% of companies close simply because the owner burns out. This happens when you combine multiple roles:
- Manually driving momentum for employees, setting tasks and priorities because people do not take ownership.
- All communication routes through you. For Masha in the warehouse to ship goods to Petya, you have to personally give the order to both.
Run a simple experiment. Go on vacation for a week. If operations grind to a halt and your phone is exploding with questions, it means you are centralizing all processes on yourself and heading straight for burnout, leaving yourself no energy for strategy.
Conclusion
Working capital (cash, inventory, raw materials, goods in transit) is the engine of your business.
Many “romantic” founders dream of tripling in size without understanding that to do so, they must find two additional volumes of that very same working capital before revenue comes in. The most dangerous thing to do in hard times is to spend working capital by drawing from it to cover salaries or rent. That is destroying the future. A smart owner in a crisis will downsize staff or shrink office footprint, but will cling to working capital with their teeth, because it is the printing press on which their business is produced.
If you do not know the exact amount of your working capital and its trajectory—you are not managing a business; you are relying on luck.
Alexander VISOTSKY
