How to Spot the Signs of a Failing Business

Between 1843 and 1855, he failed over and over again with a chain of dry good stores he opened in Massachusetts. So, Macy decided to take a huge risk by moving to New York and setting up a store on Sixth Avenue. He was counting on it being further north than any other dry good stores at the time.

Macy’s risk paid off. 

On the first day of business, the store took in the modern equivalent of $374 and it kept growing from there. Now, Macy’s brings in annual revenue of $24.41 billion and the company continues to thrive in a storm of retail bankruptcies throughout 2023. I’ll talk about how Macy’s has managed to stay successful later because it’s a great case study for how a business can learn from its mistakes.

This article is all about how to spot the signs of a failing business and what you can do to change your fortunes if you’re in dire straits. To do that, I’ll be referencing data from our Financial & Bankruptcy Outlook: Retail report we released this month.

Sales and revenue are critical for a company to grow long-term. And as we’ve seen first-hand, declining sales and revenue over several years can have a considerable impact on a company’s growth. Oftentimes, it can tip a struggling business with mounting debt and insufficient cash flow over the edge and push them to bankruptcy.

Serta Simmons Bedding is a perfect example of this, as it filed for bankruptcy in January 2023. Prior to bankruptcy, it was drowning under its $1.9 billion debt load and its cash reserves were running dangerously low, as it had $345 million of cash as of Q2 2022 (down from $518 million at year-end 2021). During the company’s financial earnings call earlier this year, CFO John Linker attributed the company’s financial troubles to the long-term impact of COVID-19, a decline in industry demand beginning in 2022 and slower economic growth.

I’m not saying that every company with declining sales and revenue will automatically fail and go bankrupt. Other factors affect a company’s overall financial health. Take Lowe’s Companies, for example. The company has never filed for bankruptcy. But in the second quarter of 2023, Lowe’s net sales decreased 9% to $25 billion, compared to the same period last year (although they still came in line with estimates). Plus, the retailer’s net income dropped 10% to $2.7 billion.

Another retailer that has struggled financially is Neiman Marcus Group. The luxury goods retailer filed for bankruptcy in 2020 and has been experiencing sales and revenue challenges ever since. A recent revenue drop of 9% for the quarter that ended on April 29, 2023 is one thing. But an EBITDA decrease of 25% to $124 million and a 5% drop in store sales is especially troubling, with weak product demand. 

Earlier in 2023, Neiman Marcus Group CEO Geoffroy van Raemdonck said in a Fortune interview that Neiman Marcus plans to focus on the top 2% of customers who are the wealthiest and make up 40% of its sales. But given the above stats, this may not be the best move. 

It can be hard to grow a business if you can’t rely on your customers to pay their invoices on time. This can have a significant impact on cash flow and make it hard to pay your own bills on time. It’s a cyclical effect. That’s why it’s so important to monitor the Days Sales Outstanding (DSO) metric.

DSO is the fastest way to determine the relationship between a company and how it gets paid by its customers. A low DSO of 30 days or less indicates collections are efficient and cash flow is steady. If a company has a DSO that is lower than the industry average, this is also a good indicator that its collections process is more effective than its competitors.

However, a failing business will have a DSO score that’s much higher than the industry average. And it can be compared with other key Accounts Receivables (AR) metrics, including:

• Average Days Delinquent (ADD): This is how many days on average customer payments are late. A high number is a red flag.

• Turnover Ratio: A number that shows how fast a business is collecting revenue from clients. A high ratio means that there are lots of open accounts with uncollected payments.

• Collection Effectiveness Index (CEI): The total percentage of accounts that revenue is collected on. The further away from 100 the score is, the higher the chances of the business not collecting payments from all customers.

There can be several reasons for cash flow problems. This can include declining income, customers paying late and operating expenses increasing. One retailer that has been seriously impacted by a drop in cash flow over the last few years has been Stein Mart. Filing for bankruptcy in 2020, there have been lots of challenges for the retailer.

As our Financial & Bankruptcy Outlook: Retail report reveals, Stein Mart has had considerable trouble paying its bills on time. In fact, all its outstanding bills for the last six months (May through October) were delinquent (91+ days). And June was the worst month, with the value of its delinquent bills increasing by 191.66%. According to Creditsafe data, the company’s DBT was 105 as of October 2023. This means any company providing services/goods to the retailer would have to wait over three months past payment terms before they would receive their first payment.

While Stein Mart’s financial troubles are significant, it doesn’t help that the retailer’s parent company Retail Ecommerce Ventures is experiencing its own financial troubles. As Creditsafe Head of Brand and Spokesperson, Ragini Bhalla, explains in TheStreet, “Based on a Wall Street Journal report in March 2023, Stein Mart’s parent company Retail Ecommerce Ventures was exploring options to get out of the financial trouble they’re in, including a potential Chapter 11 bankruptcy.

Stein Mart’s troubles highlight a key lesson for retailers. If you don’t optimize your collections process and keep an eye on your cash flow, it could have serious consequences for your business. 

There’s good and bad debt for companies. Bad debt is a type of expense that occurs after repayment by a customer (when credit has been extended) is no longer considered to be collectable. Essentially, it is an irrecoverable receivable. Any business that extends credit to customers should account for the possibility of bad debt, as circumstances and market conditions can change rapidly and affect if a company is able to make payments.  

Bad debt has likely attributed to retail bankruptcies in the last few years, especially since the pandemic put a major financial strain on companies and caused declines in sales and revenue. Take JCPenney, for example. The retailer filed for bankruptcy in 2020. One of the biggest reasons for its failure was that its debt overshadowed equity. Specifically, its liabilities which covered long-term debt and obligations, totaled $7.2 billion, compared to equity of $829 million.

Another retailer that has been suffocated by debt is Belk. When the retailer filed for bankruptcy in 2021, its debt load had become too high ($1.9 billion). This was further aggravated by the pandemic, which led to a 32% decline in sales year-over-year between March and December 2020. 

But Belk is unlike other retailers who have failed in that it exited bankruptcy just one day after filing for Chapter 11. The retailer secured $225 million of new capital, reduced its debt by approximately $450 million and extended maturities on all term loans to July 2025. Creditsafe data also reveals that 95.14% of Belk’s bills were paid on time in October 2023. And the value of its delinquent payments (91+ days) dropped consistently between June and September 2023. These are signs that the company is on a good path to recovery post-bankruptcy and is taking the necessary measures to keep its debt under control.

Accounts Payable can make or break a company’s cash flow. If a company’s cash is running low, then the company will likely struggle to pay its bills on time. And this will show up in their business credit report in a few different ways.

First, you might see that the percentage of outstanding bills that have been paid on time have dropped drastically in recent months or over a period of time. Second, you might also a growing number of late payments, particularly those that are delinquent (91+ days). 

As we discussed in our Financial & Bankruptcy Outlook: Retail report, Stein Mart has been struggling for some time with paying bills on time. If you look at their payment behaviors, things don’t look all that great for the company. Between November 2022 and February 2023, Stein Mart’s DBT hovered between 95 and 99 (which are very high, as it is). But then its DBT rose to 105 in March of this year and has stayed there since. This is not a good sign and indicates the company is likely running out of cash and may have considerable debt piling up. Unfortunately, there haven’t been any financial earnings reports released since Stein Mart filed for bankruptcy in 2020. This makes it difficult to fully ascertain their financials and how much debt they have accrued in the last three years.

At the end of 2020, Retail Ecommerce Ventures bought the struggling retailer during a bankruptcy court auction for $6.02 million. Since then, Retail Ecommerce Ventures has fallen on hard times itself. A source told the New York Post that REV’s debt totaled approximately $200 million, with revenue and losses of about $60 million in 2022, compared to about $150 million in sales and about $90 million in losses in 2021. At the same time, it’s been reported that REV executives have opened the financial books of their privately held company to prospective investors for a potential sale of all their assets, a bankruptcy filing or a last-minute financial deal that could save them.

When we looked at the payment behaviors of Neiman Marcus, we could see that the luxury retailer also struggled recently with paying its bills on time. Over the last six months (May through October 2023), its track record of paying bills on time has been erratic. For instance, 82.55% of its bills were paid on time in September 2023. But then the following month, that dropped drastically to just 57.05%. Meanwhile, the number of late payments (1-30 days) increased drastically in the last two months – rising from 14.13% in September to 39.22% in October.

But it’s not all bad news for the retailer. Our data indicates that most of its late payments are only 1-30 days late and very few are delinquent. More specifically, Neiman Marcus has improved on paying its bills, with late payments (61-90 days) and delinquent payments (91+ days) dropping considerably in the last two months. While 4.41% of its bills were delinquent (91+ days) in August, this dropped to 2.14% in September and 2.77% in October. At the same time, the value of outstanding bills dropped drastically in October too. For example, the value of late payments (1-30 days) dropped by 55.75% and the value of late payments (31-60 days) dropped by 79.64%, compared to the previous month. Meanwhile, the value of late payments (61-90 days) fell by 97.02% and the value of delinquent payments (91+ days) fell by 79.36% in October.

But just because a company hasn’t filed for bankruptcy doesn’t mean it always pays bills on time. In 2023, Target’s figures fluctuated between positive and negative results across the board. And in terms of paying bills, our data shows the number of on-time payments dropped from 87.7% in August 2023 to 77.94% in September.

Now that you know the signs of a failing business, one of the quickest wins is to go back to the basics with your cash flow management. Do an analysis, understand what’s causing the problems and adapt from there. Conduct thorough cash flow forecasting so you know when to expect dips in revenue and how to adjust for that.

Efficient cash flow management is a major reason why Macy’s has gone from strength to strength for nearly two centuries. The retailer has been able to weather the storm of retail bankruptcies by being disciplined with sales forecasting and inventory turnover. CFO Adrian Mitchell said in the company’s Q4 2022 earnings call that Macy’s “made significant progress in leveraging data and analytics to better forecast sales demand, receipt timing and flow across the supply chain.” The result? A 3% decline in inventory levels in 2022, which is a decrease of 18% compared to 2019.

Macy’s has been strategic in how it grows the business and has taken specific steps to keep the brand relevant over its 175-year history. With the popularity of online shopping causing a decline in brick-and-mortar traffic, Macy’s has tapped into brand partnerships to increase traffic to its department stores. Toys R Us is a perfect example of how a brand partnership has paid off. Macy’s CEO Jeff Gennette said, “Of the customers that shop Toys R Us, 25% were new customers to the Macy’s brand and 93% of these toy customers cross-shopped other categories.” 

When it’s time to batten down the hatches and get your business back on track, financial data is your best friend. Analyzing whether there are certain periods when cash flow is low and what’s causing it is a step in the right direction, as some of the companies we’ve already talked about have been doing. 

Let’s take Serta Simmons as an example. Prior to bankruptcy, the bedding manufacturer was being suffocated by $1.9 billion of debt. And its cash reserves were running dangerously low, as it had $345 million of cash as of Q2 2022 (down from $518 million at year-end 2021). According to bankruptcy court documents, CFO John Linker attributed the company’s financial troubles to the long-term impact of COVID-19, a decline in industry demand beginning in 2022 and slower economic growth.

It’s been almost a full year since Serta Simmons Bedding filed for bankruptcy on January 23, 2023. According to Creditsafe data, the retailer has made a drastic dent in paying its outstanding bills. For example, the number of delinquent payments (91+ days) and payment values of those payments have consistently dropped between August and October. Meanwhile, the number of late payments (61-90 days) and payment value of those payments have also dropped consistently during that period. This is a positive sign, indicating that Serta Simmons Bedding is taking the necessary steps to manage its debt and cash flow more effectively. That’s certainly what analysts and creditors will be looking at to determine if the company has a strong chance of bouncing back post-bankruptcy. 

Another key to unlocking better cash flow is having an airtight payment collection strategy. Nordstrom appears to be doing a great job of this, as annual revenue has consistently grown between 2019 to 2023. In the last five years, that growth peaked at 38% in January 2022. If that’s not impressive enough, the retailer has defied the retail slump with Q2 2023 earnings of $137 million, which was an 8.7% increase compared to $126 million the year before.

As part of optimizing your AR processes, you should run credit checks on all customers before signing contracts so you don’t end up with late payers. We also recommend the following:

• Use an automated invoice delivery system to collect payments instead of sending paper invoices.
• Offer a self-service portal so customers can pay when they need to and manage their finances.
• Adjust payment terms based on the needs of your business. Does it make more sense (and prove less risky) if you set your payment terms to Net 30 instead of Net 60? 

Last but not least, getting a better handle on your Accounts Payable processes will get you out of the red and back into the green. Paying invoices on time means your creditworthiness won’t be affected and you’ll be in a stronger position to secure loans and investments for future growth. 

From our research, The Kroger Co. stands out above most other retailers. Of all the retailers from our report, the grocery giant is in the strongest financial position with the lowest credit risk. And part of that success is because it pays off late payments quickly, with a low Days Beyond Terms (DBT) score of 2. It’s also worth mentioning that Kroger’s DBT score in October 2023 was over 5 times lower than the industry average.

In summary, the sooner you spot the signs of failure in a business, the better. Pay attention to financial analysis, cash flow management and track results so you can make informed decisions and minimize risks.