Tell tale symptoms of a business in crisis

Topics: Business Strategy, FMCG, Sustainability

In the second of a series of 5 articles, Shopportunity discuss how to recognize if your business is in trouble, and ways to regenerate it.

By ShopAbility for Retail World Magazine

In the first article, Margie discussed how Business Regeneration differs from improving your everyday operations, the types of areas Business Regeneration considers, and the need for diagnosis and a regular ‘health checkup’.

Here we’re going to further this theme with an outline of the symptoms of a business in or approaching crisis, to help you diagnose where your business is, and which areas might need ‘curing’.

Divining signals using all six senses, not just financials

In interpreting signals that the business model has failed or is under intense pressure to survive, the obvious place to start is with financial statements, or amongst the market data you collect.

However, a true investigation requires the use of your six senses to spot the symptoms, so we’re going to outline analysis from a number of angles.

That said, we’re going to start with financials anyway.

Financial Lens

1. Start with the macro view
Review current performance against the competitive set.  This can quickly indicate areas where the business model may be working well or highlight area of risk of failure. Key indicators include:
* Total Sales $ (scale advantage)
* Organic Growth % (wining with the consumer)
* Total Growth % (tapping the sources of growth effectively)
* Gross margin % (effective buying and efficient operations)
* Earnings % (sustainable overheads and marketing investments)
* Cash $ (funds for the future)
* Sales : Total Assets (asset utilisation)
* Sales : Employee (workforce productivity)
* Sales : Equity (financial leverage)

Sources of industry comparisons include web searches (eg,, ), Brokers Reports, Industry Groups.

2. What’s the trend, and is it your friend?
It is critical to look beyond a one year view and understand the business trajectory over a multi-year timeframe (say 4-6 years):
* Does Sales Growth oscillate between strong growth and stagnation (perhaps the impact of trade loading?)
* Are Margins on a steady decline or is recent performance an outlier?
* Is the sudden improvement in cash delivery sustainable or has the business turned off the tap on business regeneration activities?

People now understand the power of compounding interest on their superannuation (or at least that was the theory prior to the GFC!).  This same logic applies to businesses.  Over a five year period, a business’ performance can increase many-fold simply by delivering something as small as a 1% annual improvement in each of growth, cost reduction and asset utilisation.

3. The  Cash Crunch
The proximate cause of business failure is running out of cash.  But the signs should appear in the financial reports in the lead-up to this event:
* Declining cash flows (absolute $ or as a % of sales)
* Increase in accounts receivables – income recognised but cash not recouped. This may indicate the business taking on customers with increasing risk in order to stay afloat in the hope they don’t go bust. If this strategy is unsuccessful it will lead to higher risk of delinquency
* Decline in the ability to quickly service short term liabilities.  A useful measure is the Quick Ratio which is calculated as (Cash + Marketable Securities + Accounts Receivable)/Current Liabilities. The relationship with the bank is important here and sometimes businesses have not invested in those relationships whilst times were good. The bank can be your best friend and very valuable in times of need, as long as they truly understand you have a good strategy and business model
* Increase in Current Liabilities due to lengthening payment of suppliers. Whilst you want to increase you current liabilities and hold on to your cash, you need to ensure that the business does so without damaging relationships or the viability of suppliers
* A poor or worsening debt rating. Check reference agency watchlists for this.

4. Adverse Selection, aka Doing the Wrong Stuff
A common trap that can befall a business is the attraction of the wrong customers or delivery of the wrong products or services.  A common cause of this phenomenon is the conscious sacrificing of margin in the hope that the business can make it up on increased volume or by up-trading over the long run.  Sometimes the introduction of a product or service leads to the business incurring costs to service customers that were not envisaged.

Reviewing sub-segment margins can identify this business model failure.  Are there particular geographies, customers, or products that are experiencing a performance decline? Or is sub-segment performance constant, with business mix the cause of the decline?

5. The Egg Cup Game
Contrary to the popular belief that accountants are boring and lack any creativity, the Financial Statements provide many opportunities to show discretion.  Application of this discretion can be difficult to identify even with very detailed accounting standards and guidelines that have evolved over many years, but taking a multi-year view makes the task a little easier.

Take the example of accruals and provisions on the profit and loss.  Businesses use accruals and provisions to recognise estimated expenses or future liabilities they know have been, or expect with some certainty to be, incurred in relation to the operations of the business but for which they have not yet been invoiced or there is not a clear final calculation of the cost. A significant change in the way these items are reflected in the profit and loss or balance sheet could indicate a business scrambling to avoid delivering bad news or hiding the true performance of the business.

A review of the financial statement notes should identify if there are any changes in accounting policies such as revenue recognition, depreciation rates and off-balance sheet debt.

6. Sabotaging the Future

As a business starts to feel the impact of a failing model, it pulls the easiest levers it can first.  Typically these levers relate to areas where the pay-offs are more ambiguous and longer term.  Whilst this is appropriate to meet various short-term goals, the failure to invest in these longer term areas will compromise the organisation’s capabilities:
* You slash Marketing and advertising budgets on a continuous basis
* Sustained investment in fixed assets lower than depreciation (follow up with visual inspections of the assets … are they run-down/tired?) Ian McLeod, the Coles chief, recognised this recently in an article in BRW (May 14) and Coles have now made significant investment in their checkouts and scanning technology
* Your innovation pipeline is empty, and you’re not sure where your future growth will come from
* You pull money out of staff development and training to shore up the immediate term, leading to higher staff turnover in the medium term.

Market Lens

Look at your business vs similar businesses in the sector. Have similar businesses in your industry fallen over recently? What happened to them – what can you avoid? Is the industry highly sensitive to economic cycles – do businesses fall over at regular and repeated intervals?
7. Customer Failure
One of the key indications of a failed business model, is the failure to convert or retain customers.  Depending on the category and your access to data, there are a range of metrics that could indicate a failure with your customer base:
* decreasing share of shelf
* increasing trade spend % of sales
* falling market share
* customer repurchase rate declines
* declining customer satisfaction
* falling size of sales ($/order, $/unit, $/kg)
* increasing finished goods inventories
* increasing returns/write-offs.

Look, Listen, Touch, Taste and Smell
In conjunction with a review of financial or market data, you should use all your experience and judgement to help you spot those lurking inconsistencies or issues.

Whilst there is a lot to find in the data that you can look at sitting at your desk, there are a lot of other inputs you can only get from getting out and talking to people within the business (sales, customer service, non manager level) and working closely with customers and suppliers.

8. “People are your most important asset”
A business cannot operate without people, and a motivated workforce has been shown to be an enabler to superior business performance.  Whilst a review of staff turnover levels or conducting employee “engagement” or satisfaction surveys can provide a measure of science, there is no substitute to looking and listening to the staff in their work environment.  Do they appear happy and involved in their tasks? Do they take pride in their work? Are customer facing staff providing the appropriate level of service?

9. Compromising Safety
Far from being a cost impost, an uncompromising stance on quality and safety will ensure that the company is there for the long haul.  Walk around the office, the warehouse, the factory, and the store with a critical perspective:
* Are there clearly visible signs of procedures and processes in place
* Is the equipment protected to eliminate serious injuries
* Are there shortcomings in the design of the area / equipment
* Is hygiene an issue (particularly in Food / Chemical businesses)
* Are there any intriguing odours
* Is there a safety and Quality Assurance officer?

10. “No Bad News” Culture
Perhaps the hardest obstacle to overcome is an organisational culture that is unwilling to recognise its shortcomings and deal with the situation that presents itself.  Some of the tell-tale signs of this culture could include:
* Unanticipated results (management unwilling to communicate until it is too late)
* Managers fired for poor business results (the messenger gets shot – who wants to be the bearer of bad news?)
* Change in accounting policy.

In Summary

The above questions will help you determine where your business sits in the STARS model Margie discussed:  are you in Start-Up, Turnaround, Realignment or Sustaining Success?

Now you’ve done your diagnosis, what needs curing?

Next time: Putting your ladder against the right wall – Getting your core proposition right. In the meantime, we welcome feedback from you. Email us at