A company can have its income statement in the black and still collapse within the next twelve months. It is a paradox that surprises many managers, and one that insolvency data in Portugal confirms time and again: most businesses that close do not close for lack of customers, but because of problems that quietly built up in the financial structure.
This guide identifies the eight most frequent and systematic mistakes we see in Portuguese SMEs. For each one, we set out the concrete warning signs and the first steps to fix them. This is not theory — these are recurring patterns that, spotted in time, are avoidable.
Growing on other people's money until the bank turns off the tap
Undercapitalisation — having insufficient equity relative to the company's volume of assets and debt — is probably the most common and most silent mistake. It happens because growing on outside capital is easier and faster than reinvesting profits or putting in equity of your own.
The problem lies in the dynamic it creates: more debt means more finance costs. More finance costs squeeze the margin. Lower margins leave less profit to retain. Less retained profit increases the reliance on new debt. It is a loop that keeps tightening until the moment the bank decides not to renew a credit line, and the company has no equity of its own to absorb the shock.
In Portugal, the reference threshold for SMEs is a financial autonomy (FA) of at least 33%: equity should represent no less than a third of total assets. Below this level, the company is structurally dependent on external financing, and any disruption — a customer who doesn't pay, a seasonal dip, a rise in rates — can be fatal.
- Financial autonomy (Equity ÷ Total Assets) is below 30%, and has been deteriorating over the last two financial years.
- Annual finance costs represent more than 5% of turnover, consuming a significant share of the operating margin.
- The company renews bank credit lines almost automatically, without managing to reduce the outstanding balance from year to year.
- Calculate current financial autonomy and set out a plan to strengthen equity — whether through retained earnings, capital injections from the owners, or reducing non-strategic liabilities.
- Replace short-term bank credit with instruments that don't create liabilities on the balance sheet, such as factoring (advancing invoices without formal debt).
Funding day-to-day operations with overdrafts and expensive credit
There is a fundamental difference between using credit to grow and using credit to survive. When a company systematically resorts to bank overdrafts or short-term credit lines to pay wages, suppliers or taxes, it is no longer growing — it is paying yesterday's debt with today's debt.
The cost of this mistake is arithmetic and relentless. An overdraft with an APR of 22% to 28% applied to an average balance of 50 000 € over twelve months represents between 11 000 € and 14 000 € in finance costs — money that leaves the company producing no asset, no growth, no return. Multiplied over several years, this cost can consume the entire operating margin of a business that, under normal conditions, would be profitable.
The clearest symptom is staying overdrawn: the bank account that rarely stays positive for more than a few days in a row. This indicates that operating treasury cannot close the cycle without external support, and that this support carries a cost the company often underestimates because it has become normalised.
- The main bank account is overdrawn more than 15 days a month on a recurring basis, for at least two consecutive quarters.
- Monthly bank interest and fees exceed 1% of sales, the equivalent of more than 12% a year in finance costs on the business.
- The manager cannot say precisely what effective APR they are paying on the credit they use routinely.
- Compare the effective cost of current bank credit with the cost of factoring — in many cases, advancing customer invoices works out cheaper and adds no further debt to the balance sheet.
- Put in place a 30- and 60-day treasury forecast to spot the moments of greatest pressure far enough ahead to act preventively, rather than reacting in a crisis.
Paying upfront, getting paid at 90 days
Managing the treasury cycle — the timing gap between what the company pays and what it receives — is one of the areas where the most SMEs operate with dangerous asymmetries without clearly realising it. Selling at a positive margin is not enough: if the company pays suppliers at 30 days and gets paid by customers at 90 days, it is financing two months of its customers' activity with its own capital.
This problem worsens as the company grows. More sales mean more invoices to collect, more capital tied up in receivables, and a greater need for financing to sustain growth. It is one of the most destructive paradoxes of business growth: the better the business does, the tighter the treasury gets, until something gives.
The key metric here is two indicators together: DSO (the average customer collection period) and DPO (the average supplier payment period). The goal is to maximise DPO and minimise DSO, creating a cash cycle that doesn't require permanent external financing to work.
- DSO (Accounts Receivable ÷ Sales × 365) is above 75 days, well above the European average of 45 days and higher than the Portuguese average of 67 days.
- The receivables balance represents more than 25% of annual turnover, indicating significant capital held outside the company.
- The company pays suppliers faster than customers pay the company — DPO is lower than DSO.
- Calculate current DSO and DPO and compare them with sector benchmarks — the difference between the two shows the treasury gap the company is financing.
- Negotiate longer payment terms with strategic suppliers (using confirming as leverage) and shorten the customer collection period, possibly with factoring for customers who systematically exceed 60 days.
Selling at margins that look good but don't cover everything
A company can sell at a 40% gross margin and still lose money if indirect and fixed costs are not built into the selling price. This is the problem of incomplete costing: counting only the costs directly attributable to each product or service (raw materials, direct labour) and ignoring the overhead costs that exist regardless of sales volume.
The costs usually left out of costing in SMEs include: rent, management, accounting, insurance, depreciation, sales and marketing costs, software licences, and the share of the owners' time devoted to the company. When these costs aren't allocated per product or customer, the company operates under an illusion of profitability — until the net result comes in and doesn't add up.
The break-even point — the turnover needed to cover all fixed and variable costs — is the indicator that forces this problem into view. Many SMEs have never formally calculated it and operate without knowing whether they are above or below the sustainability threshold.
- Gross margin is positive but the net result is consistently negative or close to zero — the difference lies in unallocated overhead costs.
- The manager cannot confidently answer what the impact on the net result would be of losing 20% of sales volume.
- Prices are set based on "what the market will bear" or on a competitor's margin, rather than starting from real internal costing.
- Calculate the company's break-even point, clearly separating fixed from variable costs — the result reveals the minimum sales volume needed not to lose money.
- Review the costing method for the main products and services, building in a share of fixed overhead costs proportional to each line's weight in turnover.
Buying machines that sit at 20% utilisation
Investment in fixed assets — equipment, machinery, vehicles, premises — is often presented as a sign of growth and solidity. And it can be. But when done without prior analysis of the expected return and without a cash flow plan to support the associated debt service, it becomes one of the most silent causes of financial deterioration.
The problem is that investing in fixed assets ties up capital for years, while the return depends on assumptions that rarely play out exactly as planned: the customer who justified the purchase may cut orders, the equipment may end up underused, demand may change direction. Meanwhile, the leasing or bank-credit instalments keep falling due on schedule.
A telling indicator is the ratio between the equipment's utilisation level and its installed capacity. Equipment running below 50% utilisation for more than six consecutive months indicates the investment was made before there was enough demand to make it pay — a direct destruction of capital.
- Annual depreciation represents more than 8% of turnover, indicating a level of fixed assets disproportionate to the activity generated.
- Working capital is negative or has deteriorated significantly after a major investment — the working capital was tied up by the capex.
- The company took on medium- or long-term bank credit for investment without having produced a three-year cash flow projection to validate the debt service.
- Before any major investment, calculate the impact on working capital and project monthly cash flow over 24 months, assuming the pessimistic utilisation scenario.
- Assess whether existing underused fixed assets can be made to pay (subletting, services to third parties) or whether it is more rational to divest and free up capital for the operating cycle.
Capital sitting idle in the warehouse while the bank piles on pressure
Inventory is an asset, but it is an asset that generates no return while it sits idle. For many SMEs in industry, retail and distribution, the warehouse represents one of the company's largest tie-ups of capital. And the more days the product stays in the warehouse before being sold, the higher the cost of financing that capital and the lower the liquidity available for operating needs.
Excess inventory often results from overly optimistic sales forecasts, from bulk buying to secure discounts without accounting for the cost of holding, or from a safety-stock policy that was never recalibrated against the reality of demand. In sectors with perishable products or short life cycles, the problem is even more serious — the stock can become obsolete before it is sold.
Days Inventory Outstanding (DIO) is the metric that quantifies this problem: it measures how many days, on average, products spend in the warehouse between purchase and sale. A high DIO compared with the sector benchmark indicates the company is tying up capital unnecessarily and squeezing its treasury.
- DIO (Average Inventory ÷ COGS × 365) is significantly above the sector benchmark, or the company has never formally calculated it.
- There are items in the warehouse that have gone more than six months without any outbound movement, representing capital that is permanently tied up.
- The company presses the bank for more short-term credit while holding high inventory — it is financing with debt what it could reduce through more efficient inventory management.
- Calculate DIO by product category and identify the items with turnover below the minimum profitable threshold; consider clearing that stock even at a discount, freeing up immediate capital.
- Put in place a purchasing policy based on real sales forecasts (not optimism) and review safety-stock levels in the light of suppliers' actual lead times.
When 60% of your revenue sits with a single company
Revenue concentration in a small number of customers is one of the most underestimated risks in Portuguese SMEs, and at the same time one of the easiest to quantify. When a single customer represents 40%, 50% or more of turnover, the company is no longer independent: it has become economically dependent on the management decisions of another entity over which it has no control.
The consequences can materialise in different ways. The customer may renegotiate prices downward, exploiting the bargaining power that the dependency gives them. They may systematically delay payments, knowing the company cannot do without the relationship. They may cut orders abruptly for internal reasons that have nothing to do with the supplier's quality. Or they may, in extreme cases, run into financial difficulty, dragging the dependent supplier down with them.
This mistake is particularly insidious because concentration usually grows in a gradual and positive way: the satisfied customer who asks for more, the contract that renews with growing volumes. The company grows, but its risk exposure grows even faster.
- The largest customer represents more than 30% of total revenue — the general rule of thumb is that no single customer should exceed this threshold.
- The three largest customers account for more than 60% of revenue, which means that losing any one of them threatens the company's sustainability.
- The company has already changed prices, terms or service conditions at the request of a dominant customer without being able to hold on to the original terms — a sign that the dependency is already translating into adverse bargaining power.
- Map the current concentration of the customer portfolio and set concrete diversification targets for the next 12 and 24 months — recognising the problem is not enough; you need a sales plan to correct it.
- While diversification is not yet achieved, use factoring selectively for the largest customers, limiting the credit-risk exposure to each of them.
Using the company as a personal bank account
In many family-run or single-owner SMEs, the line between the company's finances and the owners' personal finances is thin, and often permeable. Personal expenses pass as company costs. Company capital is used for the owners' needs with no formal record. Income is mixed with advances against profits with no planning criteria whatsoever.
The problem is not only accounting or tax-related, although it is that too. The central problem is that this mixing makes it impossible to know, precisely, what the company's real financial health is. The operating result is artificially distorted. The cash balance reflects a reality that is not entirely the company's. And when important financial decisions have to be made — seeking financing, assessing an investment, negotiating with a customer — there is no reliable data to base them on.
Beyond the impact on the reliability of financial information, using the company as an extension of the owners' personal account systematically erodes liquidity: resources leave and don't come back, or come back late, and the company ends up structurally weaker than its formal figures suggest.
- The "other receivables" balance on the balance sheet includes significant amounts corresponding to advances to owners that were not settled in the same financial year in which they were made.
- The accountant recorded personal expenses as company costs in at least two of the last three financial years, even if apparently marginal.
- The owners have no fixed, documented remuneration: they use the company bank account for everyday expenses without a formal system of advances and settlements.
- Set a fixed monthly remuneration for the owner-managers (even a modest one), formally separating employment income from profit distribution, and treat the company as an entity with autonomous finances.
- Audit the balance sheet with the accountant to settle open owner current-accounts, and set a timetable so those positions don't build up again in an undocumented way.
A complete diagnostic in 2 minutes
Want to know which of these mistakes applies to your company's specific situation? The structured financial diagnostic identifies the highest-risk points and suggests the metrics to monitor first.