How to Spot Financial Red Flags in your Business?

If your business in Kuwait seems too good to be true, perhaps it is. Growth is rising, profits are up in the sky, and cash is flowing – BUT! Have you looked closer at the numbers? Red flags heading into your financial statements can cause massive disasters threatening your business in Kuwait - especially if they are ignored.  In this blog, we will uncover the real warning red flags in your Kuwaiti companies, even if everything seems perfect. Investigation is the rational step to detect where things went wrong in the financial statements, and whether it is rooted in the business itself or the result of bad management decisions in businesses in Kuwait. Financial management in Kuwait plays a crucial role in ensuring such risks are identified early, before they spiral out of control.

Businesses in Kuwait need to focus on their Due Diligence, as the purpose of the investigation is to assess commercial and legal risks, as well as opportunities arising from the transaction. Thus, reviewing or auditing your financial records to detect any mistakes before making transactional deals with other businesses in Kuwait is great - but it is recommended to have a prior discussion to be fully aware before the decision-making process in the business.

Accordingly, due diligence is an important step for business analysts to take it into consideration when they analyze Kuwaiti companies before any investment decision. As a financial consultant said “The only way you will ever permanently take control of your financial life is to dig deep and fix the root problem.” – Suze Orman.

Let's state the identifiable red flags in businesses in Kuwait:

Increase in Debt to Equity Ratio

Debt to Equity ratio is a financial ratio that detects the amount of debt on the company in comparison to the company’s equity. If the percentage is high, threats are on the stakeholders shares. Therefore, it may be of concern for any potential investor. Additionally, it could further affect the business reputation in the Kuwaiti & Global markets.

Consistently decrease in Revenue

For businesses in Kuwait, revenue is the most important account to focus on. A consistent decrease in revenues is a clear threat to the business sales & must be addressed immediately to avoid financial distress.

At the end of the day, red-flags are common, as mistakes do happen. Keeping your business running can be draining and long but also is an exciting process. The important part is to acknowledge the alerts, take the help of due diligence and act on it. This is the key to efficiency, great business decisions and accurate reports. In order to reach higher revenue and calculate your expenses in a proper manner, aim to maintain an accurate Profit and Loss report and fulfill your business goals in Kuwait.

Contact us today and experience how our innovative solutions and dedicated support can transform your financial practices in Kuwait and the GCC markets.

info@alkhuzam.com | +(965)22260014 | +(965)66162610

Located at: KIPCO Tower, Sharq, Kuwait

Blog Author: Anjoud Alseqayani

Overlooking Inventory Management

Anomalies

Fluctuating Cash Flow

The uncertainty and constant changes in the cash flow is great example of red-flags. The cash flow statement is one of the major financial statements that shows the operations, financial and investment aspects of businesses in Kuwait. In consequence, unstable cash flows are a major red-flag that contributes to poor management performance. On the other hand, with too much cash, managers could manipulate cash flow statement, as a result, leading to poor decisions and further financial instability.

An anomaly in the financials, where numbers are higher or lower than what would normally be expected, is a red flag that requires further investigations. Sudden changes in some accounts, whether lower or higher, are considered a warning and threat. The most common account is expenses in the Profit and Loss Statement, and if it is very high, it should be a cause of concern for businesses in Kuwait.

Not maintaining accurate inventory records is major red flag, as it leads to common errors like overstocking, theft, damages, or inaccurate counts. Accurate inventory management is essential for calculating the Cost of Goods Sold (COGS) and the profit/loss. Hence, proper inventory management helps in supporting the preparation of accurate reports, operations efficiency and ultimately enhances profits for Kuwaiti companies.

Ignoring Professional Opinions

In Accounting, an Audit opinion is essential and should be a priority in the annual reporting process for businesses in Kuwait. The Auditor tracks errors in the business's financials, and an auditor's opinion should be carefully considered, whether it is favorable or not.

Have you never sought the professional experience of a Financial Advisor or Business Advisory Firm in Kuwait? This is another red flag as well. It is a critical to have expert advice on financial reporting, cash flow management, budgeting and overall accounting practices. Business & Financial Advisors provide independent services that help in the outcome of the due diligence of the businesses in Kuwait.