Every business will have a particular way of tracking and measuring how their business is performing. If you can identify when key indicators deteriorate to a level that causes concern, you can take early action.
Demand Triggers
The easiest cashflow warning trigger tends to be your daily, weekly or monthly sales revenue. When this falls below a certain amount to cover overhead or your growth target, you know to act. The questions you need to ask yourself are what drives the demand for what you do? Cashflow or demand triggers are those things that lead to sales which give advance warning that there could be a problem ahead.
The demand trigger could be:
- The number of new leads in your pipeline slows and you’re finding it much harder to close new customers. The demand triggers can be a reduction in new leads from the sales team, in-bound queries from prospects, demos or meetings booked, or passing foot traffic. The problem is new customer acquisition.
- Existing customers are leaving, a decrease in the frequency of repeat business, their spend is reducing over time or they’re switching to the competition. The problem is customer retention.
- Your inventory turnover rate (ratio of cost-of-sales to inventory) has slowed which leads to holding too much inventory (or worse, it becomes out-of-date). The problem is your product mix isn’t what customers want.
- Web traffic, social media activity, or the number of online queries has dropped. The problem is increased online noise and distraction.
There are several business ratios you could also monitor to keep tabs on how your business is performing. Review which could be relevant to you and then identify ways to strengthen these numbers.
Gross profit trigger example
Let’s say you want to track and measure your gross profit percentage (the difference between what you sell an item for and what it costs you). If your current gross profit percentage is 30%, you may decide if it falls to 25% then it’s a trigger to be concerned. One way of doing this is to use any dashboard tool or online accounting software that allows to you track these financial ratios each day. Once you’ve set the threshold for the aspect of your business, you may want to have a number of ready to go tactics to fix the problem
as soon as possible. Where is the leakage and what can you do about it? For example:
- If prices haven’t kept up with your costs, you could be losing money on certain products or services. Options to fix include increasing your prices, asking current suppliers to reassess their pricing (especially if you have a good long-term relationship), finding alternate cheaper supplies or maybe in some situations, stop offering those products and services altogether.
- Possibly you (or staff) are giving away too many discounts to customers to lure them away from the competition or to entice them to buy, especially if your staff have sales target to hit. The solution can be more focused staff training or educating them about margin and why it can be better sometimes to lose a sale than sell it too cheaply.
- Your business may be at risk of theft (from staff or the public). Hopefully this is not a major issue, but it needs to be crossed off your list all the same.
- There could be an increase in wastage. Conduct an exercise to spot any areas where there are inefficiencies then devise ways to minimize waste such as buying only what you need, recycle and reuse as much as you can and make sure your employees are doing so as well.
Setting your triggers
If you can, only set a few triggers as it’s not easy to monitor many variables at one time. The trick is to focus on a handful of drivers that affect the performance of your business significantly. Ensure your triggers are measurable, can be compared to a benchmark such as last year’s figures or an industry average and most importantly, that they can be acted upon.
Problem triggers
Create your own list of what could indicate a warning that all is not well. Perhaps a certain trigger on its own is not too concerning, but over time can lead to significant issues. For example:
- Unhappy employees through increased staff turnover, in-fighting, petty arguments or an over-abundance of sick leave.
- Falling revenue per employee, which can imply disinterested or bored staff.
- Increase in customer dissatisfaction, returns, refunds and complaints which hints at poor delivery or fulfilment.
- Increase in downtime (staff or machinery) that can be a cause of inefficiency, poor scheduling or mismanagement.
Industry triggers
Determine what your industry measures. You may want to consider adding these types of triggers, for example:
- Retailers can look at foot traffic near their location, web traffic to their online store, and the changing demographics of either consumers or businesses that live or work nearby.
- Manufacturers may track work in progress, the number of contracts they have in place and the speed of their distribution channels.
- Software subscription providers will want to see the speed of adoption of their solution, how many leads are in their sales channel, on-boarding and downtime.
- Agricultural businesses would monitor yields, market prices, the weather and labour to output ratios.
Next steps
- Warning triggers only work when you can compare to past data.
- Use any past figures as a benchmark for current performance and try to compare your business with other similar businesses, especially competitors. Your accountant, bank manager or industry association may be able to supply industry benchmarks.
- Get started by tracking your financial business triggers.
The Stuff We Need To Say
This content is for general information purposes only. It is not to be relied upon as financial, tax, or investment advice or guarantees about the future, nor should it be considered a recommendation to buy or sell. You should consult your own professional advisor for specific financial, investment, and/or tax advice tailored to your needs to ensure that individual circumstances are considered properly and action is taken based on the latest available information.
