We tend to look at sales and profit to measure the health ofour business. If I have money in my bank account I must be okay. If my sales are growing we are in good shape.
I do believe with growing sales you can fix a lot of problems, but to fix them, you have to first recognize them.
As a busy small business owner, sometimes you may get caught up in the action and not recognize the warning signs!
Here are a few warning signs that your business health may be suffering:
1. Rapidly rising fixed expenses.
If we have fixed cost growing at the same rate of sales we are putting our company at significant risk if we have a downturn in sales. It may be necessary to add costs to keep up with rapid sales growth, however, it is important to analyze what expenses are fixed versus variable.
For example, you may need some help answering the phones because things have been so crazy. Before you go and hire a full-time receptionist you may want to get a temp or hire a service.
You may be thinking that you can hire someone directly for a lower cost, but you won’t feel that way if they are sitting at your office playing solitaire when the phones stop ringing.
It is much better to keep expenses variable until you have a consistent trend of higher sales to support an added fixed cost.
2. Lack of consistent policies and procedures.
I know, I hate policies too! But they are necessary. If we grow too fast without any policies and procedures established we will soon hit a ceiling on our growth or actually implode.
The problem is that your business isn’t scaleable without consistent ways to handle things in the business. If we aren’t consistent about how we handle complaints, manage sick leave, update our databases, or any of the other millions of little things that we do each day, then we end up with upset people, poor decisions, expensive and inefficient processes. And even worse, we have to come and ask you, the owner, about everything we do. Soon we can’t do anything without checking with you first. You are now twice as busy and don’t even remember how you answered us the last time we asked.
You are now the bottleneck to our growth.
3. Disengaged employees.
This one you may feel more than any of the others. But usually we tend to just blame the employee, rather than try to understand why they became disengaged to begin with. Usually, there is a core issue that causes it and is the real risk to our business health.
It may be a bad attitude of one manager that is poisoning the group.
It might be too much work with little reward or appreciation.
It may be confusion and chaos because we don’t have policies and procedures and the employees always have to wait on you to do anything.
Disengaged employees are the warning sign, not the sickness!
4. Minimal repeat business.
If we are growing because we are acquiring new business that is great. It can also mask a quality problem in our products or services. We need to also look at repeat business. Are customers satisfied and coming back again? Are they referring you to new business.
Many businesses track things like same store sales increases customer sales versus prior year.
Increasing sales are good! Increased sales from current clients and repeat sales are a sign of business health.
5. An unhealthy balance sheet.
Balance sheets are the ignored financial statement of most small business owners. We are usually much more interested in the profit and loss statement. However, many warning signs of our business health can be hidden on the balance sheet.
- Poor aging of accounts receivable. We are selling stuff but not getting paid!
- Prepaid expense accounts not reconciled. Expenses not showing up on the p & l statement mis-stating our actual expense structure.
- Accounts payable being significantly higher than cash accounts.
These are just a few indicators on our balance sheet that may be warning signs to poor financial health.
Learn about your balance sheet if you don’t have a good understanding of it. It is important and can provide significant information to the true financial health of your business.
These are several areas that I evaluate when I am helping clients with their businesses. How about you? Are you aware of the warning signs? This may be a nice check list to go back and evaluate a few key indicators of the health of your business!
Steve Marr says
My experience has been Pareto’s 80/20 law applies. Around 20% of activity is largely responsible for growth and success. The key is to understand, embrace and then focus on the right 20%. In addition, 20% of our mistakes will generate 80% of our problems. When we understand and fix these issues we make excellent progress.
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An impressive share! I have just forwarded this onto a co-worker who was conducting a little research on this.
And he actually bought me breakfast because I found
it for him… lol. So allow me to reword this…. Thanks for the meal!!
But yeah, thanks for spending the time to discuss this issue here on your blog.