15 Apr Detecting Your Company’s Early Trouble Signs
CHICAGO, IL – Growing up, “life turns on a dime” was one of my mother’s favorite expressions.
She always told me that life could change in the blink of an eye. Personally, this happened to me in May 1995 when I woke up and had blurry vision. A few days later, I was diagnosed with diabetes. That day changed my life forever.
Business also turns on a dime. It’s a constant roller coaster of ups and downs. One day, you’re on top of the world. Customers will buy anything, people are paying their bills on time and everyone wants to work for your company. The next day, you can’t give your product away to prospects, your computer systems crash and your best employee leaves.
Like people, healthy businesses can become “sick” very fast. This is why the stock market places so much emphasis on quarterly earnings reports. Things can change in a matter of months.
In its first-quarter 2002 earnings, Tellabs reported a gain of 1 cent per share. In the second quarter, the company reported a loss of 35 cents per share. More of this is likely to happen in the current economic climate. Vital statistics can change drastically month to month.
So how can you detect early signs of trouble at your business? First, you need to understand how your business generates income. Read your balance sheet and income statement. Ask yourself these questions:
Can you tell where your company’s profit is coming from? There is no doubt that some lines of business will probably be more profitable than others.
Can they be divided into primary and supporting revenue streams? Some sources of sales may be dependent on others. Companies like SPSS often find that their software sales support their maintenance and service revenues. Know the relationships between your company’s different revenue components.
What are the margins on your products and services? It is certainly easier to make money with an 80 percent gross profit than a 20 percent gross profit. Software sales may have a higher gross margin than support revenues.
Are your product prices based on their value to the customer, competitive pressures or historical trends? You can do a sensitivity analysis to find out how much flexibility there is to charge more for the same products or services. Most companies charge too little for their products rather than too much. This is exactly what happens when meter parking, off-street parking and taxi fares increase in Chicago. I am convinced that Yellow Cab and Standard Parking look at each other’s pricing trends.
Read and understand your cash flow statement. You need to know exactly where cash comes from every month and what the money you spend goes toward. Know how much of the monthly profit reported on your income statement actually ends up as retained cash on your cash flow statement.
Are you behind in collecting your accounts receivable from your customers? Find out your company’s biggest offenders. Remember that customer credit is a privilege – not a right – and it’s available only to those who earn it. A customer is only a customer when he or she pays.
At least quarterly, examine the niche your business serves. Ask yourself these questions:
Is the problem you started out solving still relevant to your customers? If the nature of the pain for these customers is beginning to change or be substituted by other solutions, you may have a problem. For example, pay phones were needed when people wanted to make phone calls outside their homes. With the popularity of cell phones, SBC’s pay phones are becoming extinct.
Does your business still have a unique selling proposition? Chicago-based Expand Beyond states that with its mobile software, organizations can control business-critical databases, networks and systems from a wireless device. Everyone in your organization needs to be able to repeat the elevator pitch on why your company is different than others competing with you. Make sure you understand how this gets articulated internally and externally.
On what do the “principals” in your business spend their time? They need to focus most of their energies on generating revenue for your company rather than on administrative duties. Mike Duda, a principal at Chicago-based Pennant, spends most of his time selling solutions to current and new clients. Look at what the people who aren’t generating income do with their time and continually justify it to yourself.
How do you judge the quality of your products and your client service? Poor execution of either one of these eventually leads to a decrease in revenue. SGS Net, which provides online marketing solutions, surveys its clients after every engagement to help improve its processes.
If you are confident in the financial and competitive health of your company, think about how you would grow your business. Will you emphasize securing more clients, more projects from the same clients or larger projects? Though the tempting answer is “all of the above,” each one requires different sales and marketing tactics that take resources to execute.
In this difficult business climate, I suggest targeting larger projects with current clients.
This will accomplish two things. First of all, this focus will protect your largest corporate asset: your client base. Secondly, the project acquisition cost for existing clients is much lower than winning the same thing from new clients. Cold calling new clients is a very difficult and expensive business art even during the best times.
In addition, you should always be looking at the marketplace to your left and right (horizontal growth) and up and down (vertical growth). So your business can grow, you need to take a quarterly look in both directions for competitors and opportunities.
If you embark on any new opportunities, make sure you have the financial resources to expand. Also, be sure your growth won’t weaken your current market niche. Events that turn your business on a dime definitely make life more interesting and force all of us on a daily basis to keep our skills sharp.
Barry Moltz, a Prairie Angels co-founder, has been running small businesses with a great deal of success and failure for 15 years. His first book, “The Worst They Can Do Is Eat You: Surviving Your Business Through Hard Times,” is expected to be published this fall. You can reserve your copy at BarryMoltz.com. Moltz can be e-mailed at firstname.lastname@example.org. This article has been syndicated on the Wisconsin Technology Network courtesy of ePrairie, a user-driven business and technology news community distributed via the Web, the wireless Web and free daily e-mail newsletters. They can be found at www.eprairie.com.