Warning Signs of Underperformance
Questions for business owners and CEO’s (especially those who are preparing to exit)
Most businesses become inefficient over time but don’t realise it and the challenge for business owners and CEOs is to work out where their business is underperforming. Best place to start is by asking a series of diagnostic questions.
Here are some that will help:
1. How is my business performing against the competition?
Benchmarking the business is a way to determine how it ranks against best performers in an industry. Benchmarking looks at a range of ratios which can give an overall indication of a business’ performance as well as drilling down into specific areas.
When was the last time the business was benchmarked?
2. Are sales growing?
The common axiom, “grow or die”, holds true in most circumstances. Sales growth usually indicates a healthy business. However, some businesses end up growing sales at the expense of profitability. The key is sustainable growth. But what if sales are declining? In this case, it’s important to ask: Has there been a loss of key clients? Are our products/services still relevant? Answering these questions requires a good understanding of the make-up of sales, hence further analysis of customers and products. For a business requiring a turnaround it may mean getting back to the profitable core.
3. Is there a strain on cash flow (working capital)?
If cash flow is becoming tighter it’s important to make sure there are adequate budgets and cash flow forecasts. Making sure debtors are paying on time and close monitoring of aged receivables become increasingly important. What about suppliers? Can they be paid within terms? Ensuring good cash flow extends into having both great customer service and excellent relationships with suppliers.
4. Has there been a loss of key management or high staff turnover?
Not only does ‘corporate knowledge’ walk out the door when key people leave, it also impacts on productivity (think of all the time it takes to get staff trained). Owners and CEOs need to seek reasons behind high staff turnover. A business that is profitable usually provides job security and job security tends to increase morale. A business with good morale leads to a more engaged workforce which helps with innovation. Innovative businesses have a better chance of being continuously transformed.
5. Have overheads become excessive?
Over time businesses get stuck with ‘legacy’ overheads, a bit like a boat constantly sitting in water gathers barnacles. Looking at the percentage of overhead vs sales over time provides an insight into this problematic area. Close monitoring is essential as this is a common cause of underperformance.
6. Do we know what our customers want?
When was the last time customers were asked why they buy the business’ products or services and how can they can be improved? A lack of understanding of what customers want or need will over time adversely impact sales. Customer research should be an ongoing process because their needs or wants change over time which is why competition changes.
This is not an exhaustive list of diagnostic questions however, they highlight some key warning signs of underperformance. Rarely is there one cause of underperformance but several factors working in tandem.
If you’re thinking of getting your business ready for sale, we can help Maximise Value through our Profit Improvement process.