May/June 2009
SIGNS THAT YOUR BUSINESS IS HEADED FOR TROUBLE
by
John S. McCallum
John S. McCallum is Professor of Finance at the I. H. Asper School of Business, University of Manitoba. His column is a regular feature of Ivey Business Journal.
The signs that a business is in trouble really are there for everyone to see. However, the challenge for a manager is to see the signs while they are still taking shape and not when they suddenly appear with blinking lights. Regular contributor John McCallum describes how a manager can recognize a sign while it’s taking shape, before the lights start blinking.
Businesses rarely wake up one morning and find themselves in trouble. It takes time to get there and there are usually plenty of warning signs along the way. Good executives are sensitive to those signs and act decisively to deal with things. Not-so-good executives get mileage out of the “right out of the blue” defense. Herewith, some of the signs your business is headed south.
It is the rare business that is not affected in a big way by the state of the overall economy. Rising tides do lift most boats and vice versa.
One of the most obvious signs that trouble is brewing is a developing downturn. The farther ahead a business is in positioning for downturn, the better it will weather it and the faster and stronger it will come out of it. The key things to manage heading into a downturn include cash, receivables, inventories, employment levels, capital expenditures, liabilities, union contracts and overall spending.
Downturns do, from time to time, surprise in both their timing and severity but much of the time the economy is actually a good deal more predictable than is commonly thought. The current downturn is a case in point. It is going to be more severe and last longer than was anticipated, but the signs have been there for some time that Canada was running out of steam: one quarter of our GDP is exported to the U.S., whose economy has been slowing at an accelerating rate since the end of 2007. That Canada goes where the U.S. goes is the cornerstone of our economy; executives who forget this do so at their peril. Huge debts, very low savings and a major decline in the stock market have turned the Canadian consumer into a tinderbox; consumer spending is now about two thirds of our economy. Canada is a major global commodity producer, and persistent downward pressure on commodity prices, especially oil, should have had executives on heightened downturn alert months ago. Leading-indicator statistical series that have a history of being out in front of the economy, like building permits, confidence and the stock market, have been down for some time. Businesses started scaling back their capital expenditure intentions months ago; capital spending has a huge multiplier effect on economic activity. Finally, before this recession, we had spent less than two of the last 25 years in recession; the business cycle still lives and trouble has been overdue. Executives can be forgiven for misjudging the timing and severity of this downturn, but if they missed it altogether, they just were not looking.
An economic downturn is trouble for business. But within a business, there are specific signs of trouble. They read like a checklist of executive responsibilities.
First, customers. Businesses exist to provide customers with goods and services at prices that exceed costs. Everything in one way or another in a business begins and ends with a customer. No customer; no business; simple as that. Not gaining new customers at the usual rate is a bad sign. Losing customers to a declining economy is also a bad sign, especially long- term customers. Losing customers to the competition is flat out terrible.
Nothing portends trouble for a business like customer trouble. The customer is every business’s “canary in the coal mine”. Whoever said the customer is king was right.
Second, reputation. Reputation is what those who matter to your business think of you. Reputation matters because everyone from the customer to the employee to the supplier to the banker makes choices about you based on your reputation. It is not always fair but people often find it easier to rely on reputation rather than seek out hard facts when making choices.
This is the example I use in class. We have bears near our summer cabin. Bears have personalities that range from lapdog to serial killer. Nevertheless, their reputation is trouble so only someone who likes playing Russian Roulette does a bear interview to determine whether Yogi is lapdog or serial killer. You beat a hasty exit, and so be it if you missed the lapdog bear experience.
Monitor what people think of your business. If you are consistently near the bottom of your peer group on reputation, fix it. Reputations do not get better by themselves. Allowing a poor reputation to become chronic can be terminal.
Third, employees. Your employees, especially those who directly touch your customers and your products, are crucial to success. They are your business’s link to your revenues. If your employees are out of sorts with you for whatever reason, that is a problem that needs to be addressed. Bad and deteriorating employee morale does not end well. One of the best signs that you have employee problems is when you notice that you are losing too many good employees to other employers.
Monitor your employees and their morale. Make an effort to find out how they are feeling, what their issues are and what they think of your business. Dig deep. Resentment that is not disclosed can be lethal. Show that you care about employees. With morale problems, merely trying can count. Bear in mind that only on rare occasions will you not be able to draw a straight line between employee problems and management. One of the most important factors in job satisfaction is feelings about the boss.
What is called moral hazard is often a major factor in employee problems. It can be at the heart of why your best people decide to leave.
Moral hazard is the effect that not dealing fairly with a situation has on the behavior of people. Moral hazard in financial institutions is much in the news these days. An example: persons A, B and C have a bank mortgage; A and B meet all their payment obligations; C does not even though he or she is able, preferring instead to spend the mortgage payments on holidays. The bank lets C get away with it. Are A and B likely to feel that it makes sense to keep making mortgage payments? As the country music song goes, “Fool me once, shame on you; fool me twice, shame on me.” The absence of consequences for bad behavior is hazardous to future good behavior.
Moral hazard in the workplace often manifests itself in the poor work habits of a few that are not dealt with by management. Why should I work hard if others do not and there are no consequences? Moral hazard in the workplace is the one bad apple in the barrel that rots the whole barrel. With good employees, it either turns them into not-so-good employees or departures. A lot of employee problems have their roots in moral hazard.
Fourth, the product. The product is what businesses sell to customers. Executives should worry at the first sign that the product is starting to slip in customer favour. The usual culprits are price, service and quality. If your product is slipping you can rest assured that someone else’s is not; that usually translates into lost orders. Product trouble that is not fixed in time becomes bigger product trouble.
Fifth, costs. Costs that are getting out of line with the competitions’ are an important indicator of trouble. Costs that are growing faster than inflation are also a bad sign. Costs cannot remain out of line indefinitely without pricing and/or product quality suffering. One of the executive’s most important responsibilities is controlling costs. It is not a pleasant task. Saying “No” never is. It is called management.
Sixth, the balance sheet. Another bad sign is too much debt, especially short-term debt, relative to assets and equity. Debts must be serviced as contracted; the greater the debt, the more pressure on the revenues that provide the funds for servicing; the greater the debt, the harder it is to fund your future; the greater the debt, the greater the likelihood of accidental financial crisis. Rapidly rising debt without a sensible explanation is another one of those coal mine canaries.
Seventh, financial markets. Financial markets provide your capital. It does not augur well if you find that capital is costing more and/or is less available and there is not a market-wide explanation like rising interest rates or a credit squeeze. Providers of capital are primarily concerned with getting their money back with a decent return; if they are singling you out for a hard time, it is because they are downgrading your prospects. Wise executives do not get defensive with their banker. They figure out what is wrong and deal with it. Listen to your banker. The banker’s comments can be a good indicator of trouble.
Trouble rarely comes to a business without a warning. The problem is that the early signs can be quiet and subtle. Executives are expected to pick up on this music and get ahead of the curve. Part of the job of the executive is heading off trouble no one saw coming, as thankless as that usually is.
Reprint: 9B09TC09
Order a reprint of this article
|
