Warning signs that your business is failing.

Are these just tough times or is it time to bail out? B. E. tells when to close your doors instead of sinking money into a drowning business.

PENNY MCCONNELL, FORMER OWNER of Penny's Pastries, in Austin, Texas, just knew she was headed for business success when she landed a $500,000 account

with Southwest Airlines to produce a line of packaged cookies. McConnell, who sold decorative cookies whole sale to bakeries, gift shops, hotels and caterers, watched her sales soar: from $160,000 in 1994 to $400,000 the next year. The high did not last long, however. Penny's Pastries began to crumble when it failed to keep up with Southwest Airline's production demands.

It's a story repeated all too often. A small business owner seizes upon an opportunity for business growth and moves into areas where they have limited or no experience. Such was the case for McConnell. Penny's Pastries went from supplying fresh cookies by the dozen to producing five million units, thus requiring a new formula, packaging, equipment, a bigger plant and more employees. Despite blatant warnings that it was time to jump off the burning ship, McConnell held steadfast at the helm. But despite her courageous efforts, the company sank. A year later, she finally had to file for bankruptcy.

According to the Small Business Administration, roughly half of all start-ups go out of business within four years, mainly due to inadequate planning, undercapitalization, poor cash-flow management and indebtedness. Although many of these firms could not have been saved, some could have reversed course or bailed out with smaller losses if they had recognized and responded to early warning signs.

For business owners who claim they don't know where to look, start with your company's balance sheet and income statement. While the number of failing U.S. businesses--those that have closed or filed for bankruptcy--declined by less than 0.5% last year to about 71,194, according to Dun & Bradstreet, the liabilities of those businesses increased by 29%. This is a good indicator that these firms were overextended in debt, with little cash on hand. Liabilities of the failed businesses totaled $37.5 billion, compared with $29 billion for the 71,558 failures in 1994.

"Many black businesses fail because they are more undercapitalized than other businesses," says Harold "Hal" Brown, associate dean and director for community economic development at San Diego State University College of Business Administration. They also run aground, he continues, because their owners "fail to do the necessary market research to justify the need for services and products. They think they have a good idea or product, but they don't form a committee of experts to advise them along the way."