Unfortunately, there aren’t obvious warning signs to tell you that your business in trouble. There are, however, very specific signs that warn you of impending dangers, if you know where to look. The most obvious are immediate cash flow problems, but is there something that is an earlier predictor, signs business failing? Usually, when you’re short on cash, you’re already in crisis mode!
Let’s work backward to identify the signs you can detect before you’re out of cash
Rising Accounts Receivable: When looking at A/R and inventory, you have to use days instead of absolute dollar amounts. This allows you to adjust for changes in sales. An increase in accounts receivable is caused by a lack of collections. Many small businesses don’t have a collection policy and only focus on it when they need cash. Unfortunately, this is often too late. Receivables could also increase because of bad credit. Establish a credit policy and stick to it. A customer that doesn’t pay is worse than having no customer at all!
Rising Inventory: Increasing inventory leads to cash shortages. Why are they increasing? Is it seasonal? Is it growth? Increased prices? Stagnant inventory? Invest in an inventory control system. It is well worth the investment.
Falling Accounts Receivable: Having low accounts receivable is a good thing, right? Yes, assuming that it doesn’t represent a slowdown in sales.
Falling Inventory: You can’t sell it if you don’t have it. If your inventory is dropping below historical or industry levels you could be losing sales.
Increasing Overhead: Many small business owners run out of cash and immediately look at overhead. Makes sense because overhead doesn’t make you money. That being said, you can only squeeze so much out of it. You still have to keep the lights on and pay the phone bill. Hint: Analyze everything that is paid via ACH bank draft and/or automatically billed to your credit card. Because you often don’t see those bills, it becomes “out of sight, out of mind.”
All of those were lagging indicators, meaning they represent activity that has occurred in the past. That’s great, but is there a way to proactively look at something before anything happens? Sure, we call these leading indicators.
Sales: Every business should have sales metrics that they manage. Managing activity is important, like website traffic, inbound phone calls or sales appointments. But activity doesn’t necessarily equal results. At some point, you have to measure sales in terms of new customers, new products, old customer wallet share, etc.
Marketing: Marketing should not be confused with sales. Marketing metrics are a big step for small business because they are more ethereal and don’t deliver immediate results. The most obvious metric is Return On Investment. Try to measure your marketing effectiveness by each activity (yes there is a way to measure everything). Depending on the value of the customer, you should be seeing multiples of one to four times your dollars spent.
Product Innovation: I’m sorry, but the days of standing pat with existing products and services are long gone. I don’t have a good metric in general, but I would say if you’re not introducing at least one new service or product per year, you’re going backward. Not sure what to bring on? Ask! All of the emphasis on digital marketing often misses its greatest value: connection to your market in real time. You don’t have to guess at what product or service will work or not. Find a recurring problem for customers and fix it.
Need help with figuring out more ways to help your business grow? Read our free article 7.5 Ways to Improve Cash Flow
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