The Warning Signs Most CEOs Miss - Until it's too Late

By Doug Zeisel, TCV Growth Partner -

Most companies don't fail because of one catastrophic event. They fail because management ignores a series of small warning signs until those problems become impossible to reverse.  By any measure, the most expensive problems in business are the ones management fails to recognize early.

As a Certified Turnaround Professional, I have seen too many companies fail because warning signs were ignored until management had very few options left. By the time I am called into some companies, cash flow has deteriorated to the point where:

• Vendors have stopped shipping critical materials.

• Customers are beginning to lose confidence.

• Banks have transferred loans to their workout departments.

• Creditors are filing lawsuits.

• Key employees are leaving.

• Payroll is becoming difficult to meet.

These problems rarely happen overnight. They develop gradually, building on one another until the company reaches a financial tipping point.  Unfortunately, once a business reaches this stage, the available options become increasingly limited.

Sometimes a strategic buyer can inject new capital and replace the leadership team that allowed the business to drift into trouble. I experienced this firsthand with a Florida lumber company that we successfully sold to a strategic acquirer, preserving the business and many of its jobs.

Other companies are forced into Chapter 7 liquidation, while others attempt to reorganize under Chapter 11. Although Chapter 11 can provide breathing room, many reorganizations ultimately fail unless management quickly restores profitability and liquidity. In some cases, new investors or private equity firms provide debtor-in-possession financing, bringing fresh capital while requiring significant operational and leadership changes. The best turnaround is the one you never have to perform.

The Early Warning Signs Every CEO Should Watch

Shrinking Profit Margin

One of the earliest indicators of trouble is deteriorating profit margins. Every CEO should receive monthly financial reports from the CFO comparing:

• Gross margin

• Operating margin

• Net profit

• Budget versus actual performance

• Year-over-year comparisons

Margins can decline long before cash becomes a problem. Common causes include:

• Rising labor costs

• Higher raw material prices

• Operational inefficiencies

• Excess overtime

• Poor pricing discipline

• Product mix changes

Without regular financial reviews, these issues often remain hidden until profitability has already eroded.

Declining Sales

If revenue stops growing, profits usually follow.  As Rick Vohrer likes to say: "If the top line isn't growing, the bottom line probably won't either." A monthly sales review should answer questions such as:

• Are fewer prospects entering the pipeline?

• Are close rates declining?

• Has customer demand changed?

• Did a major customer leave?

• Has a competitor entered the market?

• Is the sales team executing effectively?

Declining sales should always trigger investigation—not excuses.

New or Stronger Competition

Markets change quickly. Competitors may introduce:

• Better products

• Better technology

• Lower prices

• Faster delivery

• Better customer service

If your marketing and sales teams are not continuously gathering competitive intelligence, your company can lose market share before management even realizes what happened. Regular team meeting with the CEO and CFO are essential to disseminate learning's and create solutions.

Rising Fixed Expenses

Inflation and changing business conditions can quietly squeeze profits. Examples include:

• Insurance premiums

• Rent

• Software subscriptions

• Utilities

• Professional services

• Equipment leases

• Employee benefits

Every expense should periodically be questioned.

Ask:

• Do we still need it?

• Is there a better supplier?

• Can technology reduce the cost?

  
  

Small increases across many categories can significantly reduce profitability.

Outgrowing Your Working Capital

Ironically, rapid growth can create its own crisis.  As sales increase:

• Accounts receivable grow.

• Inventory requirements increase.

• Payroll expands.

• Production demands increase.

Without adequate working capital, profitable companies can still run out of cash. Management should plan growth carefully by forecasting:

• Cash requirements

• Accounts receivable

• Inventory needs

• Borrowing capacity

  
  

Having an unused line of credit before you need it is far better than trying to obtain financing during a cash crisis.

Poor Customer Quality

Not every sale is a good sale. Before extending significant credit to new customers, ask:

• Are they financially stable?

• Do they pay vendors on time?

• Have credit references been checked?

• Will they become an outsized concentration risk?

  
  

One large customer who pays 90 days late can create serious cash flow problems.

Weak Cash Flow

Profit is important.  But cash flow keeps the doors open.  Every company should maintain a rolling 13-week cash flow forecast.  Too many businesses simply check their bank balance and assume everything is fine.  By the time cash becomes critically low, management has usually lost valuable time.  A cash flow forecast allows leaders to identify problems weeks—or even months—before they become emergencies.

Operational Red Flags

Financial problems often begin with operational problems.  Watch for:

• Increasing employee turnover

• Declining productivity

• Growing customer complaints

• Missed delivery dates

• Excessive inventory

• Aging accounts receivable

• Declining employee morale

• High overtime

  
  

Operations and finance should always be viewed together.

Solutions

Every CEO Needs a Financial Wingman

Many small and mid-sized companies believe they cannot afford a CFO. I would argue they cannot afford not to have one.  Whether full-time or fractional, an experienced CFO provides much more than financial statements.  They become the CEO's strategic advisor by:

• Monitoring financial performance

• Maintaining forecasts

• Identifying emerging risks

• Improving cash flow

• Working with department leaders to solve problems before they become crises

Good CFOs don't simply report history—they help shape the future.

Restore Profit Margins

If margins are declining:

• Review pricing strategies.

• Renegotiate supplier contracts.

• Eliminate low-margin products or customers.

• Improve production efficiency.

• Reduce waste.

• Invest in automation where justified.

Growth without profitability is not sustainable.

Respond to Competition

If competitors are taking market share:

• Understand why customers are switching.

• Improve your value proposition.

• Differentiate your products or services.

• Invest in innovation.

• Improve customer service.

• Strengthen your sales process.

Competing on price alone is rarely a winning strategy.

Control Overhead

Regularly review every expense. Consider:

• Obtaining competitive bids from suppliers.

• Consolidating software subscriptions.

• Eliminating unnecessary spending.

• Improving energy efficiency.

• Using artificial intelligence to automate repetitive administrative tasks.

• Streamlining workflows to eliminate bottlenecks.

Many companies discover meaningful savings without reducing headcount.

Manage Growth Carefully

Growth requires planning.  Before pursuing aggressive expansion, determine:

• How much additional working capital will be required.

• Whether existing systems can support increased demand.

• Whether staffing levels are adequate.

• Whether financing is already in place.

Growing too quickly without sufficient capital has caused many otherwise healthy businesses to fail.

Final Thoughts

Most business failures do not begin with a dramatic event. They begin with small problems that go unnoticed—or are ignored.  The CEOs who consistently build successful companies are those who identify issues early, measure performance objectively, and act before problems become crises.

The warning signs are almost always there.

The question is whether someone is watching closely enough to see them. That’s why CFO’s are an essential member of a management team whether fractional for smaller companies or full time for larger ones.  Need help staying on top of the warning signs?  Feel free to contact me at doug@tcv-growth.partners or Dave Costello at dave@tcv-growth.partners