All stakeholders share the risk when a business is spiraling down. Directors, however, have fiduciary responsibilities which they are obliged to accept when they sign up for duty. In cases of corporate failure, they face added accountability if the Courts, administrators or liquidators’ step in and evaluate their role leading up to crisis.
The way they respond to signs of corporate trouble will determine the amount of scrutiny they face should the company fail.
Whilst directors and top management are more likely to be aware, than not, of problems within the business; stubborn corporate pride and ego usually gets in the way. This causes delay in correcting the problems; working towards a solution and bootstrap a failing company back to financial health.
This false veil of pride and ego renders directors and even upper management unable to recognize the key warning signs that suggest a business is on its way toward trouble. By the time a company is visibly sliding toward financial ruin, management can do very little.
There are a myriad of visible markers and early warning signs in a properly optimized business supported by structured systems. An optimized business is an ideal insurance policy to have in place as all businesses will inevitably face challenges as it progresses through different stages.
Best advise here is to seek help from experts with “LIVED” experience to help optimize and transformas early as possible. Big corporates have forever been investing in optimization and transformation initiatives as part of their core strategy. It is not as costly as perceived and is not exclusively for big corporates.
However, for businesses who haven’t yet embarked on the business optimization journey or are in the midst of identifying how to optimize, there are ten common higher-level warning signs that mark a company heading for trouble.
Directors and managers can use these to gauge overall corporate health and management team effectiveness. If, as a director or a manager you answer yes to any of these questions, there is trouble on the horizon. The time to act is now.
These serve as an extension to the 5 Vital Steps to Resuscitate Your Business article covered earlier.
1. Is top management over-extended?
Whose work is top management really performing?Or, are they managing tasks that have little impact on goals?
When top managers continue to perform functions that should be done by others, they are over-extended.
Solution: Management should only perform work for which no one else is as qualified to do; managing the areas necessary and critical tomeet corporate goals. Delegate the rest. Define and clarify key managers’ roles and responsibilities. Assess subordinates’ competence; retain them if appropriate, replace them if not. Monitor key metrics to remain informed about conditions without being immersed in them.
Financials alone do not show you how to run the business. Focus closely on:
- Sales (Volume In) – where and how revenue is generated. Is it from existing customers and contracts or new business?
- Operations (Volume Out) – how are you getting the product or service out the door?
2. Is the employee turnover rate excessive?
This a key sign of underlying problems. Results of a deficient hiring process, inadequate training, or poor management.
Ignoring this is usually weighs heavily on the business and shows up tangibly as low morale, lost wages, recruiting costs and lack of productivity.
Solution: Clearly define job responsibilities, performance expectations, rewards, and scope of authority. Give focused attention and talk to employees, but more importantly, listen to what they say. Employees are acutely aware when and where problems exist.
3. Are communications ineffective?
Ineffective meetings, management information, or inter-departmental coordination usually sucks a business dry from the inside out. The larger a company becomes the worse this gets.
Solution: If endless meetings are accomplishing a lot of “bull” then limit the scope of topics discussed, establish an agenda with clear outcomes, and stick to them. Posturing wastes time and productivity, so demonstrate organization and force structured meetings.
Endeavor for NO “closed door meetings” policy. Frequent closed-door meetings show signs of instability, insecurity and will most certainly set off the rumor mill.
4. Are compensation and incentive programs yielding unsatisfactory results?
While it seems obvious that you should reward successful job performance, be careful what you pay for.
Solution:Plan and Structure rewards appropriately. Tie Pay-for-performance systems directly to the company’s goals, vision and mission. Only Pay for execution and outstanding performance, nothing less.
Rewards on the performance of gross margins is more effective than rewards on gross sales. This is because the burden of poor performance is share, and hence more likely to be a subject of corrective action when faced with substandard performers.
5. Are goals not clearly stated?
Persistent failure in achieving business goals suggests a problem more serious than a lack of performance. It shows a lack of clarity in the goals, vision and mission of the business.
More importantly, it implies a failure to secure “buy in.” All internal stakeholders; the shareholders, the board and the management team must all be in sync.
Solution: Identify and focus on the one thing the company does very well; key competencies and strengths no one else has. Eliminate the false sense of what the market wants. Identify and set goals that are in sync with these strengths. And then articulate these goals succinctly across the entire organization.
The company’s goal must reflect clearly in its mission statement. Set a mission statement that tells customers, employees, and stackholders where the company is headed. A good mission statement should address six elements from the business strategy:
- Customer need: why and what will they buy?
- Market definition: who will we sell to and where are they?
- Distinct competence: why will they buy from us?
- Service / Product definition: what do we do or provide?
- Mode of Servicing the need: how will we deliver our products and services?
- Levels of integration: how much will we do?
Avoid the pitfall of the continuous strategic and operational planning process; producing plan after plan which sit on the shelves gathering dust until the next cycle. Commit to a plan, measure against it and correct course as a continuous improvement process. Most of the gain is in the process.
Remember the company’s ultimate real goal is to make money!
6. Is new business waning?
If the company is not winning new business and growing at expected levels, chances are it is out of touch with the market. Reasons are typically high prices, unresponsive proposals, giving more than is required, etc.
Solution: Commit to winning new business, identify targets early and tailor specifications whenever possible. Keep a close eye on the evolving market and customer needs. Bid to win, but manage for profit and growth.
7. Are key client relationships deteriorating?
Determining and clearly differentiating if this is due to poor market conditions or poor service from you would be a good place to start.
Solution: Should the cause be poor service: manage customer relationships carefully and in accordance with the changing customer needs. Give specific responsibility and autonomy for nurturing customer relationships at all levels of management.
Avoid the false sense of security. Most customers simply stop buying without warning. It is therefore your job to cultivate a strategy to nurture management commitment and involvement to improve and address the perception of the company and its products / services in the market place.
8. Does the company create “products in search of markets”?
Products or services developed before market needs are assessed waste resources and are difficult to sell.
Solution: Disciplined self-analysis, market research and competitor analysis must become a priority. Identify how your key competencies satisfy customer needs and produce benefits.
The course of least resistance and expense to enter a market is with products or services that meet an existing demand.
9. Do financial and management reports cover the wrong information or not enough information to cover key indicators?
Symptoms typically include consistently late financial statements; recurring negative cash flow; constant bickering with or change of outside auditors; excessive year-end adjustments; relentless focus on the past rather than corrective actions.
Again, businesses cannot be managed on P&L or balance sheet performance alone. Other measures are critically important, such as cash flows, new business generated, operational efficiencies’, etc.
Solution: Financial and operational reports must be accurate, timely and pertinent. Report to measure key areas of risk within the company. Prepare budgets and forecasts, then manage them; Deeply understanding and managing performance at each level of the business.
10. Does the business have a track record of failed growth plans?
Failed attempts at growth or expansion plans leave scars and drain businesses of cash, time and morale. Management fear to act when new opportunities present themselves. Resulting in suppressed hopes for growth or expansion.
Growth and expansion efforts fail because of inadequate cash, poor management, lack of market analysis, or improper systems.
Solution: Build a management team adept at problem solving, decision making, team building, and managerial analysis. Or implement a recruiting or management development process that embodies these skills.
Understand why you are successful in your present marketplace, and ‘model’ those conditions in a new marketplace.
Acknowledging a problem exists, empowers you to do something about it.
Model success to produce growth by modeling management skills, you can adapt to unchartered environments and bypass mistakes that harm the bottom line.
Learning to look for signs of trouble in a business is core to service as a productive director and constitutes proper corporate management. These signs are not always obvious, but they are there.
Trouble, once set, can compound at a frightening rate. Therefore, equally as critical as identifying the problems, being able to quickly and decisively implement solutions can be the difference between survival and failure.
Diminishing sales, declining profits, mass employee exit, aggressive creditor demands, and no cash are only part of the equation. So, whom should you turn to for help during times of crisis? Who can handle the crisis management role?
First and most importantly, clear thinking must prevail. Very crucial and most often the hardest pill to swallow is the willingness of the directors to ask “are we the problem?”.
Next, not likely, but, if there is a qualified leader within the company, delegate the job of turnaround to them, and provide appropriate autonomy and support.
But, by far the most appropriate course of action lies outside the company in the form of a transformation or turnaround specialistwho has experience restoring value to a troubled company. Someone with “LIVED”experience. They can drive the change and steer the company in the most structured direction without emotion and bias.
This person must have an active operational orientation, be decisive, isolate the problems and be able find solutions quickly in all areas of the business.
The real focus should be to change the leadership style. Leadership requirements differ between healthy, growing companies and those in trouble.
In the stable or growth scenario, “team building” and “coaching” are the buzzwords which allow for mistakes and longer lead times to achieve goals.
But in initial crisis and subsequent turnaround situation, time is the enemy. It requires decisive, quick action with one primary goal; to survive and get well.
Ultimately, the longer you wait to admit that the company is heading for trouble, the more difficult the resulting problems will be to solve. Identifying and understanding the root issues is the catalyst toward change and recovery.
A few hard pills to swallow now may be “the saving grace……”. Pick up the phone and get someone on your side to keep you on track while you execute.
The question therefore is, how does a business owner effectively step back and evaluate whilst in the “eye of the storm” and in seemingly overwhelming crisis?
If you need an external eye or a sounding board, call us for an obligation free assessment.