Is your business simply limping along a little – or is it more serious? Could it require a business turnaround to get it performing again?
Most businesses become inefficient over time and need to make changes to remain in the game. From rising overheads to old processes, many inefficiencies negatively impact profitability and cash flow.
While running under par isn’t critical in itself, if performance is not rectified swiftly it can lead to distress, crisis and, eventually, insolvency.
To prevent this from happening, it’s important to know the early warning signs of business underperformance so that you can take corrective action.
It’s possible to implement sensible and effective business turnaround measures that can prevent you from ever reaching a crisis situation.
Here are ten of the key financial and operational indicators to look out for.
FINANCIAL WARNING SIGNS that you need a business turnaround
1. Downward-sliding profits
The sign of a healthy business is financial growth. So, if your profits have dropped rather than risen for five or more consecutive quarters, this is one of the most obvious signs of problems. Even if your figures are stagnant it should be a cause for concern.
2. Cash flow struggles
Even with business coming in, if cash shortages, overdrafts and bounced checks are keeping you up at night, there’s an issue. While it’s normal to experience fluctuations in working capital, these should be manageable. No income or cash flow budget? You’re headed for trouble.
3. Fully drawn credit lines
While some debt is expected, having to take out fully drawn advances to address liquidity issues is another clear indicator of underperformance. You should be making enough to turn a profit and fund operating cash flow without relying on long-term sources of interest-incurring credit.
4. Excessive overheads
If you’ve been in business for a while, you may be stuck with legacy overheads, such as inefficient IT systems, underutilised rented premises or excessive and unfunded employee leave accruals. When these types of operating costs are close to, or already, overtaking your sales, inefficiency is certain.
5. Declining or no capital investment
Capital investment is key to short-term growth and long-term business security. Because of this, if your ability to invest in your own business, from modern systems to new ventures, is dwindling or the possibility of it is completely off the table, you’re not in a good position.
OPERATIONAL WARNING SIGNS that you need a business turnaround
6. Poor communication
A lack of communication between departments or between management and staff can lead to ongoing operational inefficiencies. If you’ve noticed these sorts of behaviours, underperformance is probable. Defensive managers who deny or downplay negative information also spells trouble.
7. Fading product and service quality
Customers are often the first ones to notice when there’s a problem. If you’re seeing an increase in returns or complaints, this is a definite sign that you’re operating below par. Unfortunately, the resulting negative reviews and reduced client base will only exacerbate the issue.
8. High staff turnover
According to a report by the AHRI, the average yearly staff turnover in Australia is 16%. If your figures are notably higher or there is general employee unrest, this could be a sign that things aren’t running smoothly. Adding insult to injury, when key staff leave vital knowledge walks out the door.
9. Mismatched inventory
Too much, not enough, or significant obsolete stock can be a sign of poor inventory management. The repercussions of this can be increased waste, high carrying and holding costs, or an inability to meet demand and missing out on sales – all of which are unsustainable.
10. Market share losses
Losing market share to competitors is a sure sign that you could be performing better. So, if the percentage of your sales against your industry’s total sales has dropped in the past 6-12 months, you need to take note and start asking yourself why.
Solving the underperformance problem before it’s too late…
If these early warning signs of business underperformance have set alarm bells ringing, the time to act is now. Don’t wait until the situation becomes unmanageable.
Most early warning signs can be addressed with a series of measures implemented in a business turnaround scenario.
If you’re unsure of your situation or unclear on how to rectify your inefficiencies, contact our turnaround experts on 1300 727 739 so that you can start turning your business around today.