By Kazeem Olayemi Odeyeyiwa, FCA
Every corporate organisation cherishes impressive performance in the form of productivity, profitability and sustainability. No any business is set up with the intention of decline or eventual collapse. Therefore, it is important for business owners and managers to be conscious of the symptoms and causes of business decline with a view to preventing or addressing them.
By way of personal health analogy, Doug Verley, a business management expert says if you think about this like a person who is not feeling well and experiencing a headache and high temperature, the headache and high temperature are not the causes of the ill-health but rather the symptoms or early warnings signs.
Verley adds that if your doctor instructs you to take a headache pill and get some rest, he or she is actually treating the symptoms of the illness and not the cause. If, however, he or she carries out tests and discovers you have a bacterial infection and prescribes antibiotics, he or she is now treating the cause of the illness, and the rest and painkillers will help you feel better quickly.
A business is very similar. If your business is in decline and you only treat the symptoms of the problem, for instance, lack of cash in the business to cover costs, and you get a loan, the problem will continue to grow and cause major issues. If, however, you review your cost structures, pricing model, inventory and invoicing policies, you attack the problem at the root cause(s). This means that the situation will improve and prevent the future reoccurrence of the symptoms.
Therefore, the symptoms give us clues as to what may be wrong with the business; however, they provide no direction for required management action. You therefore need to be able to analyse the symptoms to identify the cause(s) and then decide on the best way to solve the underlying problem.
There are indeed many signals that indicate that a business is surging towards decline. They are often financial and non-financial in nature. There are a variety of warning signs that indicate that a company is experiencing financial distress. Being aware of these signals can help prevent failure. The following are some of the signs which could help you avoid financial distress.
Financial Signals
Declining or negative profit margins: One of these signals is declining or negative profit margins. Declining profit per sale suggests problems with cost management, pricing or competition. Poor profit margins are usually the first indicator that a business is not doing well.
When a business struggles to break even, that is an indicator that it will not sustain itself from internal funds and will be forced to raise capital externally. This will raise its business risk and lower its creditworthiness with creditors, suppliers, investors and banks eventually limiting access to funds, leading to eventual collapse.
Negative cash flow: Another signal is negative cash flow. Negative cash flow statements are a critical indicator of financial distress. A negative cash flow statement implies that the company is paying more cash than it is generating from its operations. If cash flow stays negative over a sustained period, it is a signal that cash in the bank could be running low. And this can be very dangerous.
Payment delay by customers: Payment delay by customers is another of the numerous signals of business decline. When customers take too long to settle their payments with a company, it is a signal of business decline. This situation can severely stretch the cash flow and as a result, the company will not have enough cash on time to pay its own creditors and address liabilities. In situations where the company significantly depends on only one or two major customers, this risk is greatly high.
Low current ratio: Low current ratio is also a business decline signal. Current ratio is the ratio between current assets and current liabilities. Best practice dictates that this ratio should always remain greater than one. To the uninitiated, this means that the company’s current assets are enough to pay off its current liabilities. Where the ratio is below one, trouble is already rearing its head.
Poor sales growth or declining revenue: When there is no growth despite massive marketing activities, this could mean that the market is not satisfied with the product or service and the business may inevitably close down.
Declining relationship with the bank: When relationship with the bank becomes significantly strained, asking for extra security, personal guarantees, debentures, withdrawing overdrafts and of course declined loans, it more often than not implies that the creditworthiness of a business has been adversely eroded.
Lack of financial reports: Many business owners do not know the financial position of their businesses. Similar to flying blind, this is always a recipe for disaster. By not being able to track rising costs and accounts for payables, a business may become insolvent due to lack of good financial information. A company may be growing rapidly making profit but also suffering negative cash flows.
Borrowing to cover shortfalls: When a company is constantly borrowing and asking its investors to inject more capital, this is an underlying sign that it is increasingly finding it difficult to sustain itself operationally. At this point, a critical re-evaluation is needed to assess whether the venture is viable in the long run.
Declining ROE and ROCE: Reduced returns on equity and capital employed signal inefficient use of financial resources.
NON-FINANCIAL SIGNALS
Apart from financial signals, there are also non-financial warning signs that indicate that a corporate organisation’s performance is moving towards the shore of decline.
Weak or inexperienced leadership and management: One of the non-financial warning signs of business decline is weak or inexperienced leadership and management. Weak or inexperienced leadership, lack of clarity of vision, inability to adapt or poor decision-making can cripple a business. Management systems that rely heavily on one individual for decision-making could result in a decision-making crisis.
An inexperienced management team with weak organisational skills as well as poor understanding of business may also lead to problems. Also, internal problems such as changes in senior management and the resignation of members of the Board of Directors can also bring about organisational decline.
Lack of innovation or adaptation: Inability or resistance to timely adoption of new technologies or failure to adapt to realities of new market shifts (e.g., Kodak, Nokia, BlackBerry) can quickly lead to decline or make an organisation become obsolete in terms of its offerings.
Poor quality of products and services/declining market share: When the quality of your product starts to decline, it is more than likely that customers will start buying from competitors. This automatically is a sign of business decline.
Inadequate business planning: Lack of a solid, regularly updated business plan outlining goals, strategies and market analysis can increase vulnerability of a business.
Ineffective marketing: Ineffective marketing is another non-financial signal of business decline. Poorly executed campaigns, lack of brand differentiation or failure to communicate value can negatively affect visibility and sales.
Market disconnection: Failure to understand customer needs, market trends or new demand can lead to offering irrelevant products or services.
Declining employee morale and turnover: Another non-financial warning sign of business decline is declining employee morale and turnover. High staff turnover or low morale can indicate internal issues like poor management or lack of support. While it is true that each industry will have specific challenges and rates of employee retention, significant changes in employee turnover tend to be an early warning sign that a business is in trouble. Sometimes this is measured, erroneously, by changes in key personnel.
The reality is that your business does not operate in a vacuum. It has many interested and involved parties often referred to as stakeholders. At the top of this list, we will find employees. Their commitment is critical to the survival of your business.
Missed deadlines on key projects: Missed deadlines on key projects are also one of the numerous non-financial warning signs of business decline. Planning and organisation are required to get a job done, and then working out when and how you will do it. They are also about developing project timelines and meeting deadlines. When these critical skills are absent in the operation of a corporate organisation, it is a signal of business decline.
Disputes among managers or owners: Closely related to the above is persistent disputes among managers or owners. In an atmosphere of chaos, definitely, nothing meaningful can be achieved. And this will negatively affect the business.
Lack of a clear business strategy: This tends to manifest itself in analysis paralysis, too many staff meetings to debate issues, frustrations, blame and counter blame, loss of business momentum, etc.
Declining customer service: Desperate businesses have a tendency to chase money and new client transaction, while neglecting existing customers. This is also a sign of business decline.
Legal or regulatory predicaments: Lawsuits or regulatory non-compliance can lead to reputational damage for a business and cause unexpected business decline.
Operational inefficiencies: Poor systems, lack of delegation or inadequate quality control affect productivity and customer satisfaction and can lead to business decline.
Solutions to Business Decline Signals
If you feel your business is exhibiting any of these symptoms of decline, you need to act fast to remedy the situation.
One of the ways to tame these warning signals is to talk to experts or seek professional advice. Andrew Griffiths, author of “101 Survival Tips for Your Business” says if you let people, especially your suppliers and creditors know your situation and why it is happening, they will bend over backwards to help you.
In Griffiths’ words, “They don’t want to lose the money that you already owe them, and they certainly don’t want to lose your business.”
He advises that there are also businesses that specialise in turnaround management. They intervene by helping businesses to talk to their suppliers, creditors, etc. “They can mediate with landlords and financial institutions, possibly help with restructuring your debt, and generally remove a lot of pressure during these difficult times,” stresses Griffiths.
Another way to handle financial pressure for instance, is to avoid it. Griffiths says if you are concerned about the financial state of your business, then talk to your accountant immediately.
To handle this situation, you can develop a business-oriented corporate culture. Corporate culture refers to the basic philosophy underlying the objectives or goals of an organisation. Develop a performance-based culture in your employees and inculcate this culture in yourself first.
Apart from motivating your employees to offer peak performance, endeavour to put in place, exceptional customer service so that they bring more business to you.
If your products are not doing well in the market, then you need to repackage. Do market survey to find out what people are buying in the market. Then apply SWOT Analysis to the operations of competitors that are doing well. That is, try to find out their strengths, weaknesses, opportunities and threats. You can use simple questionnaire to discover these from customers.
You can also handle the situation by being open and honest with various stakeholders.
Also build a strong team. Focus on leadership development, employee training and delegation. On negative cash flow, find out the major causes of this problem so that your financial situation can get better. Implement robust financial management system. Monitor cash flow, control costs and maintain reserves.
On payment delay by customers, you need to put stringent measures in place to ensure that your customers pay your money as and when due.
Also develop a clear business plan. Create and regularly update a plan with validated market research, clear goals and strategies.
Prioritise customer needs and experience by continuously collating feedback, providing excellent service and adapting offerings.
Adopt innovation and adaptability. Embrace technology, encourage new ideas and be willing to adopt workable business models. Also implement effective marketing and branding by clearly differentiating your brand and us multi-channel strategies to reach the target audience.
Final Note
In a nutshell, the best way to tame identified financial and non-financial signals of business decline is to identify the real causes of these warning signals and proffer appropriate solutions.
Kazeem Odeyeyiwa, a Professional Accountant, Certified Information System Auditor and an alumnus of the London Business School undergoing a Doctorate of Business Administration Programme at the California Intercontinental University, USA, is the Managing Director/CEO, Repton Group based in Nigeria.
