Your Business Health Check!

If your "Spidey-senses" are telling you to read this, since you may need a health check, chances are that you definitely need one, along with the courage to take corrective action!

As we settle into 2021, finding our way through the "covid-world", it may be a good time to drop your comforting assumptions (or delusions) and take an honest temperature of your business.

As with our bodies, whilst the mirror may play tricks on you, numbers certainly won't.

At the outset of looking into any business, we tend to look at three key indicators to determine the Health of the business we are evaluating;

1. Sales Trend

2. Gross Profit % Trend

3. Cash Flow from Operations

Owners/management are no doubt well aware of how their business is doing in these three indicators - but how deep are they going into monitoring the 'underlying vitals' behind these key indicators? Regardless of the type of business you're in, the 'vitals' that underlie the Sales Trend, GP% and Cash flows of the business tend largely to be the same.

The Vitals

Based on our experience, the common vitals to be monitored are as follows;

Sales Trend - (Popularity)

• Customer satisfaction - taken at least on an 80/20 basis - whether you make personal phone calls or track via your own formal feedback system or run through the customer complaints log - this unearths problems with your product/service that cannot be ignored.

• Number of Leads (potentials) you've engaged with - compared m-t-m (month-to-month) and y-o-y (year-on-year), this figure highlights the effectiveness of your marketing efforts and how willing your clients are to recommend/promote you.

• Number of New Customers brought on board - measured m-t-m and y-o-y, this points to the effectiveness of your business development or 'hunting' sales efforts.

• Number of Repeat/Active Customers purchasing per month - to say a business has a foundation is to say it has an active / loyal customer base. Having sight of their activity is crucial. How often are you making contact with your loyal customers? Time with Customer!

• Effectiveness of Sales engagement - as measured by lead conversion rates and average transaction value on a m-t-m basis, this points to how effective your sales management efforts are.

Gross Profit Margin % Trend - (Value Capture)

• Sales trend of high margin (above average GP%) products/services - compared m-t-m and y-o-y, this points to issues around sales management and/or pricing discipline.

• The number (and itemized list) of products experiencing margin erosion (on supply-side) - compared m-t-m and y-o-y,

• Value of Discounting applied - by Customer (and by Sales consultant)

• Application of Pricing Discipline (pricing to value, dynamic pricing, pricing/discounting authorizations)

Cash Flow from Operations - (Cash Management)

• Debtors days outstanding - Having a strong collection process and cash sales component is critical to any business. Automate this as much as possible, get your sales consultants involved (where applicable), offer early settlement discounts - collect sooner. Be bold in 'managing out' slow-paying/high maintenance customers...

• Creditors days outstanding - as you know, stretching your creditor terms out is crucial to managing cash flow. Your suppliers must face a relentless barrage for better terms - it is about wearing them down (within reason). Alternatively, seek to get a lucrative early settlement discount.

• Value of Excess Stock (if applicable) - stock must be viewed as another form of cash, that gradually dissolves with time! Cash tied up/burnt in excess, slow-moving or redundant stock is a problem to keep on top of constantly.

• Expense line item increases above budget (linked to expected inflation) - People and property costs tend to make up the bulk of the expense base monitored, but this helps highlight the exceptional line-items beyond this.

• Accuracy of rolling monthly cash flow forecast - you firstly need to ensure this is prepared by the person in charge of your finances. It must show the previous month's actual and forecast, along with the forecast for the month ahead (if you're able to forecast 3 months ahead, even better) It not only sharpens the mind to anticipating cash requirements, but also to exceptions/red flags that pop up along the way. Forecasts that are constantly dramatically out, without valid explanations are a concern...

If you measure nothing else, try and at least get on top of these - they can be creatively reported all on one page, for ease of digestion.

Root Causes: These underlying vitals tend to point to the strength or weaknesses of a business's assets in the areas of production, marketing and management. By assets we mean to include people and systems, along with what is shown on the balance sheet. This is where corrective action has to be taken.

As the great Peter Drucker says, what you measure, gets managed.

Is your business tracking/measuring these? It should be. Try and aim to have them in place before the end of the next month. It is only then that you are able to get to the root cause of the decline, as you ask "Why? Why? Why?". The solutions soon emerge...

Should you wish to get the Excelerate team on board to assist you with the above, feel free to make contact with us.

Stay Focused. Hold Fast.

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