5 Early Warning Indicators Your Business Is In Trouble

Is your business in trouble?  It takes no genius to see that many small and middle market companies faced challenges in the steep recession of the past 2 years.  Whether due to luck or to great strategy and execution, the fortunate companies were those whose sales growth stalled or slowed significantly; for most companies, a significant drop in sales was the rule.  Belts were tightened, costs were cut, and companies went into survival mode.

But now, by all accounts, the economy is improving.  Admittedly, the positive signs of growth are halting and inconsistent and there’s still a lot of uncertainty about the sustainability of the improvement.  Still, there is increasing sentiment that the worst is behind us and business conditions will continue to improve in the foreseeable future.  As things return to normal (whatever that means), business owners must be on the lookout for signs that their businesses are not recovering with the rest of the economy.  We’re not talking about lagging indicators here, but rather signs that your specific enterprise is headed for more trouble.

It’s easy to pick out the obvious signs: your revenue is still falling when sales in your industry overall are increasing; payables and debt are at levels that threaten your ability to continue operations; operating losses are mounting, and the like.  But there are other signs that may be more subtle indications of a company headed for (or in) trouble.  Here are 5 potential early warning indicators:

1.   Rising sales returns and allowances – When customers are returning more goods and/or demanding more allowances and submitting more chargebacks, it’s likely a sign that there are issues within your business rather than the customers’.  Root cause analysis of the reasons for increasing returns and allowances is critical.  Some of the reasons may be: production quality has declined; orders are not being delivered timely or complete; lack of compliance with customers’ notification and shipment documentation requirements (hard copy or electronic).    Failure to identify and rectify such issues will lead to the logical next step – declining customer retention and gross sales.

2.   Employee turnover is increasing – Your employees can see signs of trouble in your business well before you do but may not be communicating it.  Instead, they’re looking for opportunities to move to positions in other companies that they believe are healthier and offer greater job security.  Exit interviews with departing employees are an important way to learn if this is the case.  Even if employees are wrong in their perception of the company’s condition, failure to address turnover will inevitably lead to trouble.  After all, it’s the best employees who have the most opportunity to move on.

3.   Vendor discounts not taken – Prompt payment and quantity break discounts almost always offer a significantly greater return on company funds than the cost of bank or other financing.  When your accounting department isn’t taking advantage of these opportunities, even if your overall payables aging hasn’t deteriorated much, it’s an early sign that there may be working capital issues. Determining if this is a process issue or a real indication of tightening cash is critical to taking early action.

4.   Fewer new products or innovations – Companies that remain successful do so by continuing to refresh their product or service offering, providing improvements and innovations that customers want or need, thereby staying ahead of the competition.  Whether your research and development occurs in the laboratory or in the marketplace, if your company’s R&D efforts have declined or are yielding fewer new ideas to bring to your target market, customers will begin to look elsewhere (that is, to your competition).  Maintaining your organization’s focus on new and improved products is essential to retaining and increasing market share.  The Big 3 automakers in Detroit suffered declining market share for years as foreign automakers offered US drivers more appealing and reliable cars.  Then bailouts were needed to ensure their survival, an option that the rest of us do not have.

5.   Customer relationships are not institutional – When customers have more invested in their relationship with your salesperson than they do in your enterprise, your business is at significant risk.  Some years ago, a company I know was acquired; the key salesperson was unhappy with his treatment at the hands of new ownership and management.  He used his strong ties to the company’s largest customer to move the customer’s business to a competitor; the company lost one-third of its annual revenue, a significant number of other key employees followed the salesperson to the competitor, and the company was quickly transformed from a profitable venture to a company with significant losses.

Actions to secure customers to the company (such as high quality, good pricing, timely delivery, great customer service) would have more than offset the salesperson’s ties to the customer.  At the very least, actions to deter the salesperson, such as a non-compete or non-solicitation agreement, could have forestalled this disastrous turn of events.

*     *     *

What should you do if you see these or other, less subtle signs of impending trouble in your business?  Don’t wait – take action promptly.  Work with your management team to understand the significance of these indicators and to develop solutions.  If internal resources aren’t sufficient to address the issues, seek help from external professional advisors.  Failure to recognize the warning signs or to delay in addressing them is a form of denial, and, as we all know, denial is the first step in grieving over a loss.  Acting quickly can prevent catastrophe.

About Ken Drossman

Ken Drossman is a Managing Director at Oak & Apple Partners, LLC. Ken has spent more than 35 years demonstrating practical financial acumen by leading, advising and guiding privately-owned, small and middle-market companies through financial and operating challenges. He has in-depth experience in all phases of financial, strategic and operating management from hands on cash flow budgeting through acquisition financing, from divestiture of business units to reorganizing and leading newly formed companies. Prior to co-founding Oak & Apple Partners, Ken has been the principal at Lakeview Business Consulting, LLC, which assists entrepreneurial business owners and their companies in achieving their business vision. Ken earned both his undergraduate and graduate degrees from The Wharton School of the University of Pennsylvania. Before founding Lakeview Business Consulting in 2006, he served for 18 years as CEO, COO and/or CFO at several privately-owned companies, in industries including financial services for hospitals; digital document storage and outsourced back-office services for professional service firms; design and distribution of personal business accessories through big-box retailers; capital goods manufacturing for national and regional retail chains; and information services for beverage alcohol manufacturing and marketing companies. Previously, Ken was a Partner at Grant Thornton, LLP, where he provided management consulting services to such companies as AT&T, Baxter Laboratories and GTE-Sylvania, as well as many middle-market companies.
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