Tips that Your Company May Be Heading for Trouble

Posted December 17th, 2012 by bbsadmin & filed under General Business, Motivation.


chessTo be good at chess, you need to be able to see several moves ahead and have a clear focus and understanding of everything around you. Running a business is much the same and if you are not careful you can find yourself headed for disaster. Following are some indicators that you might be headed for trouble.

1. Increasing Accounts Receivable

If you have not loosened up on your collection efforts and your accounts receivable are going up, you may want to look into it further and keep an eye on it. If you are supplying retailers, for example, it may mean that the industry is struggling, or it could mean there is less demand for your product making it hard to generate the cash flow to repay for the product. There can be many causes for this account to increase. As you allow this account to continue to go up the risk of not being able to collect that cash goes up. There are many tools which can help you see how your business is doing over the long run such as the accounts Receivable Turnover ratio ((Net Credit Sales)/(Average Accounts Receivable)). If you compare this ratio to past months, years, or quarters and see the ratio lowering, you may need to take a closer look at your collection effort. If your collection efforts have remained the same or have increased, but this ratio continues to drop, there may be something more to it.

2. Unsatisfied Employees

As mentioned in other articles, businesses are made up of people and are to meet the needs of people. It is foolish to think that you will be able to make a happy customer using an unhappy employee. This is especially true when your employee has direct contact with customers or business stakeholders. If Cindy comes in and purchases a pair of purple pumps and leaves with your employees sour countenece free of charge, it might not take too many more of those for her to strike out and go to a competitor, no matter how much she loved the shoes. You want customers to leave your establishment with a positive impression. In a study done by James K. Harters it was found “low job satisfaction” can lower bottom lines (New York Times). If employee satisfaction goes down too far, you could lose your employees to competitors. You must also remember that we live in an “information age” where unsatisfaction can go “viaral” through the social media whether it is your former employee or a customer who was unsattified with your unsatisfied employee. Pay attention to turnover rate and the “vibes” you are receiveing from your employees.

3. Unsatisfied Customers

As was mentioned above, opnions can go viral in this day and age. When someone posts their opinion on Facebook or Twitter, all their friends can know about it instantly. You must consider the fact that most people become friends with people who share things in common with them. So in effect, by having someone post negative opinions about your company, they may easily be negatively influencing your target. Now, more than ever, it is important to have those business strategies in place which will prevent this from happening. Remember, customers keep businesses in business. If you don’t have correct strategies in place and end up having unsatisfied customers your business may end up in trouble.

4. Surviving on Credit

If you are increasingly becoming dependent on your line of credit and the balance is going up, you might be heading into trouble. This may be a sign that you are not generating enough cash from operating activities.

5. Neglecting Debt Covenants

You must keep in mind that you may have debt covenants attached to money loaned out by the bank. These covenants can be contingent upon specific financial ratios that allow banks to call back loans if the agreement is violated. If you have not taken the time to recognize your agreements and if you don’t take the effort to ensure that you are in compliance with these covenants, your business could be in trouble very quickly.

6. Increasing Inventories

If you are unable to cycle through your inventory and it is building up, you may be having trouble with sales. It is also a possibility that there are inefficiencies in operation management caused by bottlenecks. It could mean that the business is not keeping up with current market trends leaving a lack of demand for the current products or services. The inventory turnover ratio can help you compare past inventory turnover with the current turnover to see if turnover is slowing down.

7. No Uniqueness

When you hired your workforce you probably had a list of applicants. You chose one over the others because there were unique qualities which you valued which made that applicant different from the other applicants. Similarly it is possible that one or more of the other applicants were equally or more qualified for the position, however, you only knew what was effectively communicated that made the one stand out. It is the unique attributes of the product or service and/or the price that leads one to pick your business over that of a competitor; it answers the “why xyz company instead of zyx company” when they offer the same underlying product or service. If you don’t have a clearly defined reason as to why you, your customers probably will not know the difference either.

8. Lack of Unified Purpose

If your employees don’t know what makes your company different from your competitors, it is safe to say that your customers and potential customers probably don’t know what makes you different either. When it all boils down to it, people are going to look for a unique attribute or a low price… or both when seeking to satisfy their need or want by engaging in business with you. If your employees don’t know the difference they cannot communicate the reason for your business as opposed to someone else. If they don’t know, it is probably not known by the general public. If it is not known by the general public, they don’t have the reason “why” to choose your services over your competitors.

9. Margins

Looking at your income statement and balance sheet in common size format can tell a lot about your company. For instance, if you look at a common size income statement allows you to see everything as a percentage of sales allowing you to see what eats up your sales dollars. One threat sign is when your cost of goods sold (COGS) eats up your sales dollars leaving very small margins. The higher the COGS % the lower your net income. Over time, if COGS become too large, your net income will diminish and you will be in trouble.

10. No Strategic Plan for the Future

Benjamin Franklin once said, “by failing to prepare, you are preparing to fail” (Benjamin Franklin). If you don’t have any goals for where you are going in the future, you are inadvertently planning to go out of business. It is a competitive world out there and if another business has a higher perceived value than yours, customers are going to have to make a choice as there is not enough money, or reason, to purchase from both. If you are not riding on top of the latest market trends, you are going to be crushed by them. If you have no realistic strategic plan for the future your business is in trouble.