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. Find out your cash flow warning triggers.
Setting the scene; demand triggers
The easiest cash flow warning trigger tends to be your monthly sales revenue, when it falls below a certain amount you need to cover overheads or your growth target. But this is more the ambulance at the bottom of the cliff.
The questions you need to ask yourself are what drives the demand for what you do? Cash flow or demand triggers are those things that lead to sales which give advance warning there could be a problem coming up.
It 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 the amount of repeat business from existing customers, 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 or 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, obsolete). 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 a number of 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 margin from what you sell an item for and what you pay in materials or product to sell it). If your current percentage is 30%, you may decide if it falls to 25% then it’s a trigger to be concerned. One way of doing this easily is 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 particular 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 intense 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 never 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 reduce 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 (it’s unlikely you’ll pay attention to more than two or three anyway). The trick is to focus on a handful of drivers that affect the performance of your business significantly, are measurable, can be compared to a benchmark such as last year’s figures or an industry average and most importantly, can be acted upon.
Problem triggers
Often there can be issues in your business that fall between the cracks, where on their own my not be too concerning, but add up over time. 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 fulfillment.
- Increase in downtime (staff or machinery) that can be a cause of inefficiency, poor scheduling or mismanagement.
Create your own list of what could indicate a warning that all is not well.
Industry triggers
Determine what your industry measures, 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 and the weather to output ratios.
Summary
Warning triggers only work when you can compare to past data. Use any past figures as a benchmark for current performance and also 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.
Next steps
- Get started by tracking your financial business triggers
- Decide which non-financial triggers you’d like to track and set about regular performance measures.