Apart from looking at your company’s financial statements or getting honest answers from executives, there’s no real science in determining the financial health of the company you work for. If you work for a public company, you can look at its SEC filings and investor reports. Even still, you might not get a complete picture for your department.
And for those of us at private companies, you won’t get access to those financial documents. But it’s very important to learn the art of determining your company’s financial health. If the ship is sinking, you want to know before it goes below the surface so you can find another job while there’s time. If the ship is moving full steam ahead, you want to know; otherwise, you might miss out on good career opportunities. And if the ship is changing course, you want to know so you can determine if you want to stay on for the ride.
Here’s a list of some of the key qualitative indicators of your company’s financial health:
People are promoted internally
One key indicator of good financial health is that people get promoted internally. Just as companies are more likely to hire a new CEO from within the company if things are going well, companies are more likely to promote internal people if things are going well. After all, if things are going well, you want to have people who know why things are working take on more responsibility. If a VP leaves and a Senior Director gets promoted into that position, it’s a good sign that the business unit is doing well. If the company is expanding and a Director takes on the new VP role, even better. Then the company is growing and promoting from within which means you’re chances for promotions are higher than normal.
On the flip side, if the company hires a CEO from the outside, it’s likely that the Board wants the company to change directions and improve performance. It’s also likely the new CEO will make changes to the company which could affect job security for lower level employees. Likewise, if a VP leaves and an outside hire comes into the role, management probably wants changes within that business unit or none of the director level employees have been trained adequately. The health of the business unit is likely on shaky ground. If you’re in that unit, it might not be a good sign for your career growth.
Bringing an outsourced area in house
This is something like previously having an outside accounting firm work on the monthly financial statements and then hiring an in house accountant to do the work instead. It could also go for other types of work like programming, document storage, or HR. Management usually makes this decision for one of two reasons.
First, it’s a good cost savings measure. The outside company is charging too much and there is now enough work to warrant hiring an employee to take over the work. The company wants to save money in the long run by increasing costs with an upfront investments today. It isn’t struggling so it will put in an initial investment in hiring an employee and get her up to speed.
Second, management sees some competitive benefit to bringing the work in house. When the work is in house, the company is building knowledge in that area. There can be more customization in the work and that might lead to competitive advantages down the road. Management is making an investment. And investments often mean that there is extra money and the executives are thinking long term.
Outsourcing a previously in house function
On the flip side, when an in house function is outsourced management is trying to cut costs by moving internal processes to a cheaper alternative. Executives want to cut costs, likely because they want to increase profits or revenue dropped. As one of my mentors, a founder of a startup that was acquired for over a billion dollars says, “You can increase profits by cutting costs, but you can’t grow by cutting them. You need to increase revenue to grow.”
You’ll need to find out if costs are getting cut to just to trim the excess waste or if costs are cut because revenue dropped. The former can be a good thing as it will create a more profitable company in the long run. The latter isn’t good since it means the company is struggling to make sales. And if your job could be outsourced, you are more likely to get laid off.
Reduction in benefits
Here’s a clear cut sign that the company is struggling. Management needs to cut expenses so they reduce benefits. It could be anything from salary, to health benefits, to free food in the office. The bottom line is that, well, there isn’t much of one which is why they’re cutting expenses. Cutting benefits hurts for everyone involved. Management doesn’t want to cut benefits for employees and employees don’t want to lose their benefits. The company is really hurting if this happens.
Not replacing people who quit
The closer you work to the position that isn’t being replaced, the bigger a problem it is for you. Here management is trying to save money by seeing if the role is really necessary. If that role turns out to not be necessary and you work closely with that position, it either means that you’ll have more work picking up the slack or your job might not be worth replacing. On the other hand, if it just takes some time to interview replacements or there is talk of moving someone internally to the position, then everything is fine.
More company outings
This is a great sign that management is investing in team building. There is likely some extra money flowing in the company and management wants to use it to reward the employees with a good time and have them get to know each other better. I’d also bet that the company is in the process of hiring more people which is another sign of good financial health. More people is an investment that the company will expand and there will be more work to do.
Taking inventory on equipment and assets more often than usual
This is a pretty sure sign that the company is going to either be acquired or close down and liquidate. There might be an exception because the accountants want to get a better idea of physical assets for the balance sheet, but if inventory is getting counted more often than usual, it’s likely because management is planning to sell or liquidate some part of the business. It’s not necessarily a negative to sell or be acquired, but you’ll want to keep a close watch on what’s going on. You’ll want to use the other indicators of financial health to figure out what will happen with your department.
Executives pitching employees a story that no one sees being put in action
The company is likely changing directions. Management wants to change directions but hasn’t found a way to make it happy yet. And as you know, changes in directions means that some people might get laid off, some business functions might get outsourced, and other employees will need to move to other business functions.
If executives are telling a story that isn’t in action goes on too long, it’s a sign that management is out of touch with employees. They want to move in a direction but don’t know how to get there. It’s unlikely that management will be able to turn things around.
People in suits walking around the office
By people in suits, I mean consultants or investment bankers. If consultants are walking around, management is looking to make some changes. The changes might not be bad, but some changes are going to happen in a few months.
Same for investment bankers walking around the office. That means your company is likely to be acquired, merge, or acquire another company.
All of these indicators are inflection points. I prefer to stick it out through negative times if I trust management has my back too because you can make huge gains in your career at inflection points. Take on more responsibility and be a good team player. The downtimes are when you can learn the most about the industry and the company. As other colleagues get scared and leave, you can take on leadership in your department. On the other side of the struggles will be a time of growth and that will be your chance to get promotions and raises.
But if you think management doesn’t have the employees’ best interests in mind, then move on. Sticking through negative times only works out if both management and employees trust each other.
And if you are going through the positive indicators, take on new responsibilities. Train new hires, take on new projects, and volunteer to lead new initiatives. As the company expands, you’ll have more chances to get promoted. And you might find yourself leading a new team that forms around you as the company expands.
In the comments, what are some of signs you’ve seen of your company’s financial health?