5 Hidden Signs Your Small Business Is In TroubleFrom inventory build-ups to dysfunctional sales funnels, keep your eyes peeled for these subtle signs of danger.
Of course you know your business is in trouble when sales decline, you run out of cash to pay bills or you can’t make payroll. But what about the early warnings, what we might call the hidden signs, that are not as obvious?
Recognizing these signs as soon as possible is key to getting your small business back on track. Let’s look at some of them.
Don’t worry about this if you run a service business that doesn’t manage inventory. For the rest of us, clogged inventory is like business constipation. In your bookkeeping, inventory is a dollar amount that gets bigger when you’ve bought stuff you haven’t been able to sell.
Too much inventory is a dangerous two ways. First, inventory amounts show up on your balance sheet but not your profit and loss, so they are easy to overlook. Second, an increase in inventory may tip you off to problems with sales. What was intended to go from inventory to sales is still in inventory. Does that mean one or more of your products is not selling as well as expected? Is there a problem with your sales processes?
Accountants will look for the inventory turnover ratio, which compares the inventory balance to direct costs. Acceptable numbers vary from business to business. What you should do as a business owner is watch for changes. However you measure inventory, look out when your inventory goes up compared to sales or costs.
Declining dollars per sale
Divide your total monthly sales by the total number of transactions. Do that for a series of months, past to present, and watch for changes.
Unless you’re getting more customers, fewer dollars per customer means declining sales. Are your per-unit costs going down enough to compensate? Is this a purposeful change in strategy? Causes might be changing customer demand, competition, new technology, a product line needing revamping or some other problem.
Most businesses depend on the marketing-to-sales funnel. The assumption is that marketing gathers a large number of prospects up at the top of the funnel. The process passes some of them to sales at the narrow end.
Getting people into the top of the funnel can also be called lead generation, and making the sale can be called closing. Prospects in the funnel can be called the sales pipeline. If you’ve been in business for a while, you have a sense of how your funnel works.
What you need to watch for are changes that might be danger signs. Stay alert to negative changes at the top, middle, or bottom of that funnel. Maybe the prospects in the pipeline are dwindling, or the close rate is generating fewer sales overall. The changes give you the clues you need to go on alert.
Changing ratios of new to existing customers
Not getting enough new customers means you’ve stagnated, and your business might decline as existing customers trail off. A healthy growing business attracts new customers as part of its normal process.
On the other hand, not getting enough repeat business might be a sign of problems with your products (or services), location or customer service. Maybe you have new competition. Maybe people are turning to new solutions, different from what you offer.
You won’t find standard rules of thumbs or guidelines for either of these. The ideal ratio is different for every business. What you have to watch for is changes over time.
I hope for your sake that you don’t know that feeling that comes up in businesses when nobody wants to be there. People are unhappy, not busy enough or complaining in corners. Employee turnover is high.
In a healthy growing business, people have a lot to do, they like what they are doing and they generally feel good about it. Sure, we can’t exaggerate this factor, because work is still work and most businesses also have the less desirable tasks that still need to be done. We don’t want to pretend everybody should be a Pollyanna. Ignore the occasional bad moments — but overlook a trend at your peril.
One particular sign to watch for is employees sharing stories about how dumb or annoying the customers are. If that starts to happen, either you’ve got a bad atmosphere for employees, a business problem that is irritating your customers, or both.
If you notice any of these signs, step back from the daily detail and think about the bigger picture. Are there good reasons for what you’re seeing? Maybe you have problems, but maybe it’s something else, like a deliberate change in strategy or some other healthy change specific to your business. Only you can tell for sure.
Editor’s note: Tim Berry is a business plan expert and blogger. He is founder and chairman of Palo Alto Software, founder of bplans.com and author of business planning software and books including “Lean Business Planning.”