Tag Archives: metrics

Coping With External Elements of Decline

By using tools like promotion, persuasion, buyer education, accelerated product development, process improvements or elimination, growth plans, market development, and adjusted sales practices, business owners can adapt to changes in their external operating environment. Paying attention to the following warning areas is important in coping with external elements of decline:

  1. Economic growth, which gives management an indication of the economic climate and influences expansion plans.
  2. Credit availability and money market activity, which indicates trends in commercial and investment banking affecting financial needs. Changes will affect the cost of funds.
  3. Commodity market movements, which reveal trends in raw material inputs.
  4. Capital market activity, which gives a clear signal of investors’ attitudes toward your industry. 
  5. Business population characteristics, which can advise executive teams on the number of businesses entering and exiting the industry (niche). This signal can be used as an indicator of the expansion and contraction of the market and competitive size of the industry.
  6. Price level changes, which indicate the rate of inflation. This rate influences the consumption and therefore has an impact on the company growth rate.
  7. Changes in the competitive structure of the marketplace, which affect products, pricing, and marketing and sales.
  8. Changing technology, which allows rapid breakthroughs and changes in products, processes, and marketing and sales.
  9. Cultural/social changes, which can alter buyer preferences or the conditions under which a product can be sold.
  10. Legal/political changes, which can adversely affect the marketplace or have an impact on the execution, marketing, or sales of a product/service.

Coping With External Elements

Some  businesses prosper during crises. They plan for changes and create resources that enable them to continue to function. For example, some businesses use substitute products in their processes, and their adaptability allows them to survive. In short, many strong teams do find it possible to both address and influence the external elements.

There is no denying, however, that external elements can have a profound effect on companies. Teams are forced into unique experiences when confronting situations they don’t understand. External elements are usually not a part of most businesses’s planning processes. While many will fail, some are saved–those that are adaptable and able to return to their core products and once again become profitable.

Businesses with less than 50 employees are actually the heart of the economy. Unfortunately, they are also the companies most frequently in need of a turnaround, having the same internal and external problems but lacking the business and human resources of many larger companies.  Consequently, these smaller businesses do fail, just as larger ones do, but without the press coverage.

To effectively cope with the external elements requires that the executive team plan for the unexpected and implement the plan when it occurs. Since management knows it can expect changes in economic conditions that will affect the capital and money markets, it must plan for those changes. The areas that management can control must be prepared for the possibility of external environment changes. Strategic planning that is not flexible is, therefore, useless. For example:

  • Most companies should prepare for increased competition, local, regional, and around the world.
  • Legal and political changes are always on the horizon and should be duly noted; it is not a question of whether they will affect the business, but when.
  • Being aware of cultural and social changes affecting purchasing patterns is predictive of consumer spending and its impact on the entire local business economy.
  • Changes in technology are continual and must be utilized where appropriate.

The main issue to be addressed is whether the business is making the change or being subjected to it. In either event, the management team must adapt to the new environment or be prepared to suffer the consequences.

 

Recognizing a Declining Business

In the past week, we have taken the time to look at characteristics of successful companies. In case you missed one of the posts, feel free to catch up by reading them in order (links below):

  1. How Successful Businesses Plan For Growth
  2. How Successful Companies Market
  3. How Successful Businesses Manage Their Finances
  4. How Successful Businesses Manage Their Operations
  5. How Successful Businesses Create Positive Cash Flow
  6. Revenue, Cost & Capital In Your Business
  7. How Successful Businesses Maintain Organizational Morale

This week, we are “flipping the equation” on you and examining what a business in decline looks like. As you track with the principles shared and lessons learned, you may find yourself to closely resemble a declining business in one way or another. Don’t despair! Knowing what needs to be fixed is important. You are that much closer to success than someone who doesn’t even realize that crisis is around the next corner because of ignorance.

No one is consistently successful. When things start to go wrong, however, the shrewd executive must recognize those events that are catastrophic and those that are not. Early warning signals of imminent business decline can occur both inside and outside a business. Changes in the operating environment due to external and internal elements may signal the beginning of decline. Once an executive team determines that the business is showing some symptoms of decline, the next step is to determine whether the decline is shaping up to be a twenty-four-hour bug or a terminal disease. Can it be treated? Can it be cured?

The Stages of Decline

Stages of decline include early, mid-term, and late periods, and recognition of these stages has an impact on the steps to reverse the decline. In early decline, it is very probable that the business can be totally saved and profitability restored quickly–often within a matter of months. In mid-term decline, the business has been suffering some erosion of value, and it may take a year or more to restore the value and resume profitable operations. Finally, there is a late decline. Sadly, fewer that one-third of companies in this type of serious trouble are able to reverse their decline and emerge on the other side “whole”–with existing management, ownership, and operations intact.

Before examining the warning signals of decline, we should look at the root causes leading to those signals. The earlier these causes of decline are observed, the easier it is to resolve them. The most common causes of decline–from both internal and external elements–are as follows:

The Causes of Decline

  • management by exception rather than by flexible planning
  • delegation without inspection or control–no feedback, review, or reinforcement
  • vertical organization chart with little if any interaction between departments (silos)
  • managers with responsibility for more than five direct reports
  • employees with more than one boss
  • chain of command broken when employees think necessary
  • breakdown in formal communications
  • overreliance on strategic plan
  • overreliance on management by objectives
  • senior managers’ abuse of outside activities and company benefits
  • marketing the wrong products
  • marketing in the wrong locations
  • aging workflow management techniques
  • inadequate research
  • inadequate staffing
  • inappropriate sales methods
  • unresponsive financial information systems
  • loss of competitive advantage
  • displacement by competition
  • changing technology
  • buyer preference changes
  • regulatory changes
  • economic changes
  • inadequate understanding of buyer needs
  • inadequate information flows, both between business functions and between company and customer
  • one department or business function dictating the mission, goals, and objectives of the company

All of the above causes for business decline are valid, and any one of them can precipitate the downfall of even an experienced team. Recognizing the warning signals of decline is the next step in righting the ship…

Revenue, Cost & Capital in Your Business

Positive cash flow is desirable for everyone in business. It is achieved universally through generating substantial revenues, controlling costs, and structuring capital wisely. Some tips and techniques are shared below:

Generating Revenue

Successful businesses excel at making sales. You know the saying, “the rich get richer?” Well,the corollary is that those who have revenues get more revenues as a factor of customers wanting to be associated with a successful brand. One thought you should consider is to go after markets that are less susceptible to the uncertainties of interest rates and the economy. If you were a homebuilder (you’d be an industry famous for tracking closely with the economy), you would be wise, for example to pursue both upper-income retirees and “move-up” families. These two demographic groups tend to be less affected by economic turns  and have demonstrated a time-tested pattern of purchasing homes in most any economy. Knowing the segments of your market well enough to follow suit and service the buyers with money to spend will position your company to operate for maximum profitability.

Successful executive teams know that targeting buyers with focused offerings is key to penetrating your ideal market. Regardless your market dynamics, the goal is to increase volume. With higher volumes come higher velocity cash flows. This increased velocity creates the favorable setting for financing terms that suit your financial model. Yet, it is clear that profit margins must be maintained else increased velocity exacerbate losses.

Controlling Costs

The focus of controlling costs is to optimize expenses as investments–not eliminate them! Cost management evaluates not only the amplitude of the individual expense, but its impact on organizational performance. While the general principle is to control the growth of costs, there are strategic advantages to be gained from choosing to incur the right expense for the right reason at the right time. Another major shortcoming in the financial management of many companies is the effort to wring cost out of processes and retain all of the benefit of the exercise in the hands of a greedy few. Passing along savings to customers is a great way to build a customer base advocacy. Not all of the profits, mind you, …but enough to become even more competitive.

If your organization does not have a process to monitor and eliminate waste, it needs one! Sharing items like technology, administrative labor, equipment, and offices/desks is “low hanging fruit” in this area. Most resources do not need to be dedicated to one person or department because they cannot be utilized enough to justify the additional expense. Look at ways to speed up the delivery of your product/service to market–scheduling and workflow management process improvements drive profits to the bottom line quickly, as well as freeing up needed cash flow.

Monitor invoices–make sure that payments are for things ordered  and received by specification and terms. Evaluate reporting systems. Dashboard feedback on expenses, margins, and cash activity help executives manage rather than being managed.

Structuring Capital

Get a god fix on the financial capital structure of your business and how it compares to competitors. Doing so will drive planning relative to debt capacity, valuation, growth, and many other categories. Taking the approach that debt is always a short-term tool and is to be repaid as soon as possible will increase a company’s capacity to take on debt when absolutely necessary. Think through cash reserves and how they speak loudly to others as to your management acumen and company viability.

When preparing pro-forma projections of anticipated cash flows, make sure that worst case scenarios are considered. Money on deposit is a precious commodity and those who have it are in a position of strength. Having products or services in development that can be brought to market quickly is an asset for those well-capitalized, a liability for those who are not.  Your unique debt to equity ratio should be stronger than your industry–and should reflect the commitment of the executive team to run the business according to thoughtful metrics and attention to details.

How Successful Businesses Create Positive Cash Flow

Successful companies generate positive cash flow through efficient operations and effective marketing. Generating revenue is not like raising funds for a charity–people will not offer you money simply because they agree with what you do. Businesses succeed when they are able to convince buyers that their products/services are superior to and of greater value than the offerings of other providers. Controlling costs is critical; make provisions for unavoidable cost variances and eliminate waste in areas where  costs–or at least overruns–can be avoided. Planning for adequate capital structure is also essential; debt-laden companies cannot achieve the same level of success as companies with enough equity. Being able to bring in sufficient revenues and preventing large amounts from being paid out will lead to positive cash flow.

Effective companies generate positive cash flow consistently. The business is streamlined continually to  narrowly defined core acutely focused on making sales, controlling costs, and structuring capital. Creating and maintaining positive cash flows is a continual goal of any business, and an ongoing reality in profitable ones. The exercise of staying profitable and successful requires more discipline than many executive teams are willing to enforce in their operations. For example, moving inventory in a timely manner is puzzle to many businesses that make products.; however, those who develop a formula for success in this area are well on their way to positive cash flows. Controlling costs, though, is not synonymous with eliminating costs. Eliminating costs in an arbitrary fashion can kill momentum and limit financial flexibility. Capital is a useful tool if its effects are controlled, and businesses able to avoid large debt loads are more consistently profitable.

While positive cash flow may seem like a lofty ideal to some teams, the investment and financial communities consider cash flow a distinguishing barometer of business stability. Companies with favorable cash flows can secure more favorable financing terms and receive more concessions from vendors and subcontract organizations. For example, businesses with positive cash flows can negotiate higher discounts when they are able to pay invoices early. Additionally, they can prepay materials and buy in volume for even steeper discounts. An enterprise that consistently demonstrates that it can cover more than its cost of doing business (as evidenced by positive net income) will rack up profits and retained earnings year after year and attract more customers, since buyers often feel that profitable companies are more likely to survive and meet their needs for the long run. Therefore, positive cash flow should be the goal of every employee in the business. 

One of the most important things to remember when incurring financial obligations that affect your cash flow is to stay within acceptable industry ratios. Most industries have trade organizations that publish benchmarking data to help representative companies do a better job of analyzing how they compare with norms. The analysis should not become an end unto itself, however. Use the data to have productive conversations with your CPA, banker, and investors. Unless you want a very short day in the sun, avoid reliance on debt. To remain financially competitive, choose capital financing sources wisely and do not burden your operations and marketing teams with a weight too heavy to bear.

 

How Do Successful Businesses Manage Their Operations?

After working hard on the marketing plan and the financial plan, successful executive teams develop operating plans to implement them. These are the plans that ultimately result in successfully bringing one’s idea into the marketplace–and profits into the owner’s pocket. Staffing, office administration, and work flow supervision are the primary needs. Successful businesses anticipate problems and take steps immediately to improve workflow efficiency. Supervisors and budgets are assigned to control costs. If necessary, outside fractional help is secured to make sure that appropriate resources are allocated to the best potential outcomes. In addition, the top executive may recommend steps financial and marketing teams can take to enhance overall productivity–and, by extension, profitability. For example, organizations that offer and sell the same or similar goods or services over and over usually see fewer cost overruns and therefore generate more profit per unit of sale.

Staffing a business with the correct number and types of employees makes your workplace both productive and more enjoyable. Sprinkle in some training and development and you demonstrate care and concern for your people. Create feedback loops and engagement will soar. Successful organizations increase or decrease staff levels as operating plans require. Outsourced human resources–whether through independent contractors, fractional professional staff, or subcontracting–allows your company to optimize human resources for any level of work necessary. Making preparations to finish existing projects while beginning new ones and documenting how the work will be accomplished will focus your efforts.

Administering a variety of initiatives simultaneously places certain demands on office staff as well. A successful executive team thinks through the documentation needs of the organization and assigns responsibilities to appropriate personnel. Institutional knowledge is thereby captured for the benefit of all and adjustments become easier to make. Well-organized files–physical and electronic–are another vital component to smooth business operations and can eliminate wasted time and effort, as well as reinforce best practices!

Successful supervision of field (or plant or billable or development) personnel involves more than simply the “management by walking around” approach of yore. Think about technology as a means to do more with less. Creatively brainstorm as to how to maximize the benefits of being face-to-face versus virtual–it’s a trade-off of time, money, and precious additional resources. Recruiting and hiring should reflect an effort to add to the team those who are the best cultural fit rather than simply strong technicians who may undermine the esprit de corps. Compensation and performance management systems should reinforce your value system–not stand separate from it. Think of processes like equipping, quality management, customer service, coaching, mentoring, motivating as key factors in your success. When you do, plans can be made to enable your organization’s operations to become efficient and profitable.