Many startups go through periods of financial strain during their growth. The key is not whether difficulties arise, but whether they represent a temporary setback or a sign of a deeper issue that could compromise the viability of the business.

There are certain financial indicators that make it possible to evaluate a startup’s economic health beyond revenue or growth. Analysing how they evolve can help identify risks early on and make decisions while there is still room to manoeuvre.

How to Know if a Startup’s Financial Problems Are Temporary or Structural?

When a startup experiences financial difficulties, there is rarely a single moment that marks the beginning of the problem.

Most commonly, warning signs appear gradually. Sales continue, customers keep coming in, and operations seem to run as usual. However, tension slowly begins to build: it becomes increasingly difficult to meet certain payments, external financing becomes more important, and room for manoeuvre shrinks.

In many cases, these shifts can be detected before they turn into a serious issue. To do so, there are specific indicators that allow you to assess the company’s financial strength beyond revenue or growth.

1. Liquidity: Can the Startup Meet Its Short-Term Obligations?

Liquidity measures a company’s ability to meet its most immediate commitments.

One of the most widely used indicators for assessing this aspect is the current ratio (liquidity ratio):

Formula: Current ratio = Current assets / Current liabilities

How to interpret it:

⋆ ≥ 1: The company has sufficient resources to meet its short-term obligations.

⋆ < 1: There may be difficulties in meeting certain payments without resorting to additional financing. 

However, this indicator should be analysed with caution. Not all current assets can be converted into cash with equal ease. A large volume of accounts receivable can create an impression of solvency that does not always reflect the actual cash available.

That is why, when recurring difficulties in meeting ordinary payments start to surface, it is best to look beyond the raw figure and analyse what is truly behind it.

2. Working Capital: Are Daily Operations Sustainable?

Working capital shows whether a company has sufficient resources to sustain its day-to-day operations.

Formula: Working capital = Current assets – Current liabilities

How to interpret it:

⋆ Positive: There is short-term financial balance.

⋆ Zero: The company lacks a buffer against unexpected events.

⋆ Negative: Part of the non-current assets is being financed with short-term debt. 

When working capital deteriorates consistently over time, the company usually loses its ability to absorb payment delays, cost increases, or deviations from forecasts.

In other words, it increasingly requires everything to go exactly as planned just to maintain financial balance.

3. Leverage: To What Extent Do You Rely on Third Parties?

External financing is part of the growth process for many startups. The problem arises when dependence on an external financing increases steadily.

One of the most used indicators to assess this situation is the debt-to-equity ratio:

Formula: Debt-to-equity ratio = Total debt / Shareholders’ equity

How to interpret it:

⋆ < 1: Moderate leverage level.

⋆ Between 1 and 2: Caution zone.

⋆ > 2: High dependence on external financing. 

Debt is not inherently negative. In fact, it can be a useful tool to drive growth. However, when it is used repeatedly to sustain ordinary operations or cover operational needs, it can become a factor that progressively limits the company’s options.

The Real Warning Sign Appears When Multiple Indicators Deteriorate

None of these indicators, on its own, proves that a startup is facing financial difficulties.

The real red flag appears when several of them begin to deteriorate at the same time. Tighter liquidity, shrinking working capital, and greater dependence on external financing may indicate that the company is entering a state of higher vulnerability, even if growth and commercial activity look positive.

Startups rarely fail because of a lack of data. More often, they fail because they do not act when the data is already signalling that circumstances have changed.

Detecting financial strain at an early stage is essential to preserve value and keep all options open. Taking timely action usually makes all the difference.

Act While There Is Still Room to Manoeuvre

Startups rarely go from business as usual to a crisis overnight. More often than not, there are early warning signs that something is changing: recurring liquidity issues, deteriorating working capital, increasing reliance on external financing, or a gradual reduction in the company’s ability to respond.

Identifying these indicators at an early stage allows founders and management teams to evaluate alternatives, rethink financing strategies and take action before the available options become significantly more limited.

In many cases, the difference between a temporary hiccup and a structural problem lies not only in the financial data, but in how quickly action is taken when that data begins to deteriorate.

Is Your Startup Detecting Warning Signs?

AGM Abogados helps founders, startups and investors assess situations of financial strain, evaluate strategic alternatives and make decisions while there is still time to act.

You can learn more about AGM Abogados’ approach for startups facing financing, growth, or financial difficulty challenges in AGM Abogados’ Legal Advice for Startups in Distress Service.