Reading the Real Signals in Distressed Businesses
Part 1: The Lender’s Perspective – Control Without Chaos
When businesses start missing forecasts, the numbers tell you something’s wrong. But they don’t tell you what’s wrong, how bad it is, or whether it can be fixed.
As a lender, you need to move beyond the financial metrics to understand what’s actually happening operationally. The difference between a temporary setback and a fundamental problem often isn’t visible in the P&L or cash flow statement. It’s in the patterns of how the business operates, how management communicates, and how teams coordinate around solving problems.
Learning to read these operational signals accurately is critical for making good decisions about support, forbearance, or intervention. Get it right, and you can support recovery whilst protecting your position. Get it wrong, and you might tighten controls just when the business needs space to recover, or provide support when stronger action is required.
Beyond the dashboard: Where real problems hide
Traditional financial monitoring focuses on outcomes: revenue, costs, cash flow, covenant compliance. These metrics matter, but they’re backward-looking. By the time they show problems, underlying operational issues have often been building for months.
The real signals appear earlier, in the operational patterns that eventually drive financial performance.
Decision velocity changes. One of the earliest indicators of trouble is when decision-making slows throughout the organisation. This shows up as delayed responses to your queries, postponed meetings, or management needing more time to answer straightforward questions. It might seem like busy-ness, but it often indicates that coordination is breaking down internally.
Communication pattern shifts. Pay attention to how management communicates, not just what they communicate. Are updates becoming more defensive? Are explanations getting longer and more complex? Are they focusing on activity rather than outcomes? These patterns often precede financial deterioration.
Initiative overload signals. When businesses are struggling, management often launches multiple improvement initiatives simultaneously. While this shows they’re taking action, it can also indicate they don’t understand what’s really causing problems, so they’re trying everything hoping something works.
Resource allocation confusion. Watch for signs that resources (time, money, attention) are being spread too thinly across competing priorities. This shows up as management teams that seem overwhelmed, projects that start but don’t finish, or constant reprioritisation without clear criteria.
External relationship strain. Problems often appear first in relationships with customers, suppliers, or other stakeholders before they show up in financial metrics. Listen for mentions of customer complaints, supplier payment issues, or staff turnover increases.
Reading management communication under pressure
When businesses are under pressure, management communication patterns change in predictable ways. Learning to read these patterns helps you understand not just what’s happening, but how well positioned management is to handle it.
The explanation complexity indicator. When things are going well, explanations tend to be simple and focused. When problems emerge, explanations often become longer and more complex. This isn’t necessarily dishonesty; it’s often a sign that management doesn’t fully understand what’s driving the problems, so they provide more detail hoping to demonstrate control.
Activity versus outcome focus. Listen for whether management talks primarily about what they’re doing (activity) or what they’re achieving (outcomes). Under pressure, there’s a natural tendency to emphasise effort and activity. But businesses that recover effectively maintain focus on outcomes even during difficult periods.
Past versus future orientation. Pay attention to whether management spends more time explaining what happened or describing what they’re going to do about it. Excessive focus on past events often indicates defensive thinking. Recovery-oriented management quickly acknowledges problems and moves to solution discussion.
Precision versus vagueness. Notice whether management can give you specific timelines, milestones, and success criteria for their improvement initiatives. Vague commitments like “we’re working hard on improving performance” are less useful than specific statements like “we expect to see X improvement in Y area by Z date, and here’s how we’ll measure it.”
Ownership versus external factors. While external factors certainly affect business performance, pay attention to the balance between acknowledgment of external challenges and ownership of internal solutions. Management teams that focus primarily on external factors often struggle more with recovery than those that focus on what they can control.
Early warning patterns that predict future problems
Certain operational patterns tend to precede financial deterioration by weeks or months. Recognising these patterns helps you anticipate problems before they become acute.
The management attention cascade. When senior management gets pulled into operational firefighting, they have less time for strategic thinking and planning. This creates a cascade where short-term problems consume increasing attention, leaving less capacity to address underlying issues. The cycle accelerates until management is entirely reactive.
The customer feedback degradation. Customer satisfaction problems typically precede revenue problems. But the early signals aren’t usually formal complaints; they’re more subtle changes in customer engagement, payment patterns, or order patterns. Management might not even recognise these as warning signs initially.
The supplier relationship strain. Supplier payment delays or disputes often indicate cash flow problems before they become severe. But also watch for suppliers requiring different terms, expressing concerns about business stability, or being harder to reach. Suppliers often sense problems early because they’re watching payment patterns across multiple customers.
The initiative completion failure. When businesses start multiple improvement projects but struggle to complete them, it often indicates either resource constraints or management capability issues. This pattern typically precedes more serious performance problems.
The communication frequency disruption. Changes in communication patterns—either much more frequent updates (often indicating anxiety) or less frequent communication (possibly indicating avoidance)—often precede performance deterioration.
Distinguishing between tactical and strategic problems
Not all operational problems are created equal. Some are tactical issues that can be fixed relatively quickly with adequate management attention. Others are strategic problems that require fundamental changes to approach or capability.
Tactical problems typically involve execution issues within the current business model. These might include operational inefficiencies, temporary market conditions, specific customer issues, staff turnover in particular areas, or short-term cash flow timing. These problems are often fixable with adequate management focus and reasonable time.
Strategic problems involve fundamental misalignment between the business model and market reality. These might include market shift that undermines the value proposition, competitive dynamics that erode margins permanently, capability gaps that can’t be filled quickly, cash requirements that exceed realistic fundraising capacity, or management skill mismatches for current challenges.
The distinction matters because tactical problems often just need time and support, while strategic problems require intervention or fundamental change.
Signals that suggest tactical problems: Management can clearly explain what’s wrong and how they plan to fix it. Problems are concentrated in specific areas rather than systemic. Similar businesses in the same market aren’t experiencing the same issues. Management has successfully handled similar challenges before. Required fixes are within current capability and cash resources.
Signals that suggest strategic problems: Management explanations focus more on external factors beyond their control. Problems appear across multiple business areas simultaneously. Competitors are outperforming significantly in the same market conditions. Required changes exceed current management capability or financial resources. Problems persist despite multiple attempted solutions.
Cash runway versus operational runway
Financial analysis typically focuses on cash runway: how long current cash will last given current burn rates. But operational analysis requires understanding operational runway: how long management capability, market position, and stakeholder patience will last.
Management runway. How long can the current management team sustain the pressure and workload required for recovery? Are they energised by the challenge or wearing down? Do they have the specific skills needed for current challenges, or are they operating outside their capability zone?
Market runway. How quickly is competitive position eroding? Are customers becoming harder to win or retain? Is market share declining in ways that will be difficult to reverse? Are suppliers or partners losing confidence?
Stakeholder runway. How long will key stakeholders (customers, suppliers, staff, other lenders) maintain confidence? Are relationships strengthening or deteriorating? Is reputation being damaged in ways that will affect future performance?
Operational momentum runway. How long can current operational improvements sustain progress? Are changes building on each other to create momentum, or are they isolated fixes that don’t address underlying issues?
Sometimes businesses have adequate cash runway but limited operational runway, meaning they’ll struggle even with financial support. Other times, cash runway is short but operational runway is strong, suggesting that temporary financial support could enable recovery.
The capability assessment question
One of the most critical questions for lenders is whether the current management team has the capability to navigate the challenges they face. This assessment requires looking beyond their track record to their current effectiveness under pressure.
Problem recognition capability. Do they accurately diagnose what’s causing performance issues, or are they focused on symptoms rather than root causes? Can they distinguish between problems they can control and external factors they must adapt to?
Solution development capability. When they identify problems, can they develop appropriate solutions? Are their improvement plans realistic given available resources and capability? Do they sequence changes appropriately, or try to do everything simultaneously?
Implementation capability. Can they translate plans into action? Do projects get completed on time and deliver expected results? Can they maintain operational performance while implementing changes?
Learning capability. When initiatives don’t work as expected, do they adjust approaches based on learning, or do they persist with approaches that aren’t working? Can they capture and apply lessons from both successes and failures?
Communication capability. Can they maintain stakeholder confidence whilst being honest about challenges? Do they provide useful information that helps stakeholders make good decisions, or do they create confusion or anxiety?
Management teams that demonstrate these capabilities under pressure often recover successfully with appropriate support. Those that struggle with multiple capabilities may need intervention regardless of available resources.
Creating your operational signal dashboard
While you can’t monitor everything, you can create a framework for systematically tracking the operational signals that matter most for predicting business trajectory.
Weekly operational rhythm signals. Are regular management meetings happening? Are decisions being made at appropriate pace? Are problems being identified and addressed quickly? Is communication with customers, suppliers, and staff maintaining normal patterns?
Monthly capability signals. Are improvement initiatives progressing according to plan? Is management demonstrating learning from both successes and setbacks? Are operational metrics (beyond financial) showing improvement? Is stakeholder confidence stable or improving?
Quarterly strategic signals. Is market position stable or improving? Are competitive dynamics changing in ways that affect the business fundamentally? Is management capability well-matched to current challenges? Are strategic assumptions still valid given current market conditions?
This isn’t about micromanaging operational decisions. It’s about maintaining awareness of operational health in ways that help you make better lending decisions and provide appropriate support when needed.
The lender’s role in signal interpretation
Your role isn’t to solve operational problems or make management decisions. But understanding operational signals helps you make better decisions about support, forbearance, covenant modifications, or intervention requirements.
When signals suggest tactical problems with capable management, patient support often enables recovery. When signals suggest strategic problems or management capability gaps, earlier intervention protects value better than extended forbearance.
The key is developing the capability to read these signals accurately so your decisions support recovery when possible and protect value when necessary. This requires moving beyond financial metrics to understand the operational reality that drives business performance.
When you can read these signals effectively, you become a more valuable partner to portfolio companies during challenging periods whilst protecting your interests more effectively than purely financial monitoring allows.
Next in the series: Assessing Management Capability Under Pressure – evaluating whether current leadership can navigate the challenges they face.
