April 12, 2011
By Barry Moltz
Things change rapidly in life. Personally, this happened to me in May 1995 when I woke up with blurry vision. A few days later, I was diagnosed with diabetes. That day changed my life forever.
Small business fortunes can also “turn on a dime.” It’s a constant roller coaster where one day your company is on top of the world. Customers will buy anything, people are paying their bills on time and everyone wants to work for you. The next day, you can’t give your product away, your computer systems crash and your best employee leaves without notice.
Like people, healthy businesses can become “sick” very fast. This is why the stock market places so much emphasis on quarterly earnings reports. Things can change in a matter of months—more of this is likely to happen in the current weak economic recovery.
So what are the early signs that your business is in trouble?
1. You do not understand how profit is generated in your business. Which products or services are the most profitable (not just the best selling)? Can they be divided into primary and secondary streams where one sale depends on the sale of the other? For example, in a software company, annual maintenance, upgrades or add ons will never sell if the original product isn’t first purchased.
2. You do not know the gross margins of your major products (sales minus cost of goods sold). Remember, it is a lot easier to make money with an 80 percent gross margin than a 20 percent gross margin. In most service oriented businesses, gross margins must approach 50 percent to make a healthy bottom line profit.
3. You do not know what your prices are based on. Are they set based on their value to customers, competitive pressures or historical trends? Do a sensitivity analysis to find out how much flexibility there is to charge more for the same products. Most small companies especially early in their life charge too little for their products rather for fear of being rejected and not having any customers.
4. You don’t understand your cash flow statement. Every other financial statement can be “fudged” except for this one. You need to know exactly where cash comes from and how the money is spent. How much of the monthly profit reported on the income statement actually gets retained as cash in the business?
5. You do not know how current your accounts receivables are. Find out your company’s biggest offenders. Remember that customer credit is a privilege, not a right, and it’s available only to those who earn it. A customer is only a customer when they pay.
6. You don’t know if the problem your business solves is still relevant to your customers. If the nature of the pain for these customers is beginning to change or be substituted by other solutions, you may have a problem. For example, pay phones were needed when people wanted to make phone calls outside their homes. Portable cell phone technology killed this industry.
7. You don’t know where and how you spend your time.You need to focus most of your energies on generating revenue for your company rather than on administrative duties. In fact, look at what the people in your company do who aren’t generating income and continually justify it. Escalating fixed overhead kills many companies when economic conditions change.
A Small Business Speaker, Consultant, and Author, Barry Moltz gets business owners growing again by unlocking their long forgotten potential. With decades of entrepreneurial experience in his own businesses ventures as well as consulting countless other entrepreneurs, Barry has discovered the formula to get stuck business owners out of their funk and marching forward. Barry applies simple, strategic steps to facilitate change for entrepreneurs, and get’s them growing their business once again. See his work at http://www.barrymoltz.com .