Tuesday, October 4, 2011

Find Trouble Spots In Your Business From Warning Signs

In the previous post we looked at 5 warning signs that tell you if your business is headed for trouble. These signs serve as early warning system that can help you identify and remediate problems before they become too serious.

Looking for a warning sign is just the first step in fixing things and making them better. Once you have received the red sign you need to interpret it, find the underlying causes and correct them – all before your business reaches the point of no return and forces you to close it or sell at a loss.

In general, you will find two types of problems that would cause the businesses to sputter. The first has to do with general market and economic conditions, which you may not have much control over. The second type of problems has to do with your specific business. These issues are the result of how you run your business and are totally under your control. As a business owner your goal should be to uncover issues specific to your business as quickly as possible and take appropriate actions to correct them now rather than waiting till the last minute.

In this post we will show you what could be the underlying causes for the 5 warning signs mentioned in the previous post. The next post will focus on actions you can take to correct them.

  1. Sales trends – When your sales is trending down for an extended period, particular when compared to the same period in prior years you have a serious problem. It could be the result of bad economy or something could be wrong with your business – (a) If the overall economy is down, as it is now, it is going to impact sales for everyone – some more than others. (b) The sales could also be going down as a result of declining customer service and product quality. We have found that these two are the most likely reasons for downward trends sales. (c) Another potential explanation could be new competition for your products and services. If the competitor is offering better value for the same or lower price your sales is going to take a hit.
  2. Average Ticket per Customer – Decline in average amount spent by each customer per visit could also result from overall economy or business specific problem. (a) If the economy is not doing well everyone will think twice about spending their hard-earned money. When they do spend it they will cut down on number of items or portion size. They will probably be ordering water instead of beer! In addition, they could also buy more discounted items or use more coupons resulting in lower bill amount. (b) Other possibility could be lack of products that customers find attractive, particularly the ancillary ones. As a result, they would still order the main product, but avoid extra items.
  3. Number of Repeat Customers – If you see number of repeat customers going down over long period, you better get your act together soon because you most likely have some serious issues to deal with. Repeat customers are the lifeblood of any business and when they are abandoning you they are flashing BIG, Red warning signal in front of you. The most likely reasons for this decline are customer service, quality and competition. Think about it! If your customers are getting good product at reasonable price and excellent customer service they will continue to visit your business. It's when they see the deterioration in these areas they will start looking for alternatives.
  4. Gross Margin – Declining gross margins could result from two possible sources. (a) Your input costs (cost for purchasing raw material) are going up as a result of inflation. (b) Customers are using more coupons and buying more discounted items resulting in less total sales even while your expense is staying constant resulting in lower margin.
  5. Outstanding Receivables – Higher outstanding receivables are bad for any business. It means that your customers are taking longer to pay for the purchases they have made on credit. Higher receivables could be the result of overall bad economy. If your customers are not earning enough they will take longer to pay. On the other hand, if only few selected customers have increased the time to pay you back their business could be in trouble, even when others are doing just fine.

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