How to recognize the signs of a failing business

Any business can suddenly hit a bad stretch, but when do these hiccups bear closer scrutiny? When is it time to seek help? Here’s how to identify when your company is in trouble and how to recover before it’s too late.

WINNERS AND LOSERS

Everyone knows that businesses can fail, from the smallest startups to corporate behemoths. Statistics about the failure rate of small businesses abound. Twenty percent fail in the first year, while firms in various industries (i.e. retail, transportation, and construction) can be particularly vulnerable.

By the same token, anyone with basic business knowledge can cite signs of success: steady growth, rising sales, a balanced budget, strong employee retention, and positive relationships with customers, vendors, and service providers. But what are the signs of a failing business? What warnings should be taken seriously and corrected before things go from bad to worse? And if “going bad,” what can be done to right the ship before it sinks?

As the old saying goes, to be forewarned is to be forearmed. Knowing the indicators of a bad turn and how to integrate them into a holistic view of company health can make the difference between being an object lesson to others or part of the 80 percent of businesses that make it to the next year.

ROCKS ON THE GREEN

One of the surest signs there’s trouble ahead is a notable decline in customer interaction. Customer service is a moving target and while legacy forms of communication such as letters and land lines are no longer favored, it’s still crucial to stay in frequent contact with customers.

Whatever the business model, a lack of interaction—decreased foot traffic, slower order rates, or even a lack of buzz on social media—can be a red flag that demand for whatever a company provides is either declining or being met elsewhere. If consumers aren’t talking about a company or its products, they’re talking about someone else’s.

Battling Complacency

Complacency is also a killer when it comes to success, and one of the more common causes of a company’s demise.

Early success makes many business leaders think the model that worked at first will keep working forever. But markets continually change, and smart leaders learn they must not only react to new trends but try to anticipate future needs.

There’s a reason U.S. business executives spend over $10 billion a year on change management consulting according to the Boston Consulting Group—the ones who anticipate and adapt to change will survive, while the ones who get too comfortable with the status quo often end up in the red.

Tracking market shifts, keeping up with innovations within an industry and outside it, expanding into new areas with new partners, and developing in-demand products and services can mean the difference between a company’s growth or fading into irrelevance.

Cultivating & Maintaining Talent

The customer may be king, but employees are the princes and princesses, and one of the surest signs of a business in trouble is dissatisfaction or dissention within the ranks.

High turnover, poor training, ineffective hiring practices, and low morale can paralyze a business. And, with social media and employee-focused websites increasingly prevalent, a company’s bad reputation can become public knowledge in a heartbeat.

A disengaged employee is an unproductive employee. Zenefits, a human resources service provider, cites low productivity, illness, absenteeism, and other morale issues as costing the U.S. economy up to $350 billion a year. And managers who think this can be easily corrected by simply firing problem employees are compounding their errors: the cost of interviewing and replacing a worker is often about 150 percent higher than a new employee’s starting salary.

Number Crunching

Financial performance, however, is probably the best indicator of a business that is struggling.  Debits and credits are the bricks-and-mortar of any business, and if accounts payable and receivable are not in harmony, any business is not likely to survive long.

There will always be fluctuations in cash flow, but extremes usually indicate a serious problem. When a company has poor performance, trouble paying its bills on time, or its credit rating falls, these factors must be addressed to prevent further harm to the business or its reputation.

Erratic pay patterns will not only frustrate existing vendors and other business relationships but put off new ones as well. And if slow pay persists and becomes more widespread, affecting a company’s credit rating, complaints and collection activity are sure to follow.  Vendors and customers alike may take their business elsewhere.

Aside from damage to a company’s reputation, there are many other costs associated with negative credit issues: higher interest rates, lower lending approvals, increased insurance costs, higher prices from vendors and suppliers, and even increased utility costs due to late pay.

The cost of missing payments or misusing credit may seem negligible at first, but the ultimate price in affiliated costs, fees, and penalties may be as much as four times the value of the original debt. Worse yet is losing the trust of longtime relationships and hurting their businesses by neglect.

Other Pitfalls

Finally, sometimes the most obvious problems are the easiest to overlook: rising costs, inefficiencies, and toxic relationships. Too often, business owners overlook these obvious indicators, thinking they’re just part of the process or an inevitable or unavoidable cost of doing business.

When owners or managers fail to seek out better values in equipment or routine business services, look for lower cost or substitute materials, try to increase efficiencies and performance, or research new partners, businesses are at risk.

This is especially true in industries where businesses are built on relationships. Sometimes owners and managers come to believe there’s no such thing as a bad customer, letting their underperformance drag cash flow and cause a drain on time and resources. No relationship should get in the way of basic financial performance.

RIGHTING THE SHIP

Now that we’ve covered several prominent warning signs of a failing business, it’s time to figure out what to do about them.

Fixing the problem of low customer engagement, for example, can be as simple as talking to clients. Asking customers how the company is doing and what can be improved could make a huge difference—not only by letting customers know their opinions matter, but also in actually listening to their concerns. But how this is carried out can be just as important.

While many old-school executives are distrustful of social media, promoting a company and its products or services through these venues is one of the least expensive and best ways to boost visibility. Social media management platform Hootsuite says there are over 3 billion social media users—a number that’s been increasing every year for the last decade—and targeting customers in this way can result in an average increase in spending of over $17 per person engaged.

Moving targets are the hardest to hit, so companies should never ‘stand still’ but continue to evolve. This doesn’t just mean throwing money at the next big thing; it means communicating with existing and prospective customers, vendors, and staff about what they need, and how shifts in the market can help fulfill these needs.

It’s also important to not just watch the competition and try to imitate whatever others are doing. How is the company viewed by its rivals? What choke points slow productivity or processes? What opportunities were missed by a slow reaction to change? Defining misfires and lost opportunities, and ways to overcome or prevent them in the future, can stimulate creative thinking and growth.

Outside and Inside

Owners and managers shouldn’t be afraid to look outside their own industries; sometimes the most vital developments come from unexpected sources. It’s also crucial to make sure everyone in the organization is thinking about innovation, not just those in upper management or the C-suite.

This ties into improving morale and increasing participation among staff. A happy employee is a productive employee: low morale can reduce productivity by 10 percent, while strong morale can increase it by 12 percent according to Recruiter.com Group, Inc. Many of the best ideas may come from within a company and won’t cost a dime, because employees succeed when the business succeeds.

Research from Wharton at the University of Pennsylvania found external hires tend to perform more poorly, leave more frequently, and command higher salaries than internal promotions, resulting in cost increases of up to 20 percent. Positive internal morale is a proven winner in every organization.

Strengthening the Bottom Line

Pay performance data and debt positions are the most common data points received by credit bureaus, so it’s important to make sure the best picture possible is being shared by submitting strong financial positions and regular business dealings.

It also pays to remember that court data and tax filings are matters of public record, so avoiding complaints or lawsuits and paying taxes in full and on time will avoid public information that can reflect badly on the business.

Improving credit can beget more credit, better loan and credit line offers, secure more favorable pricing and payment terms from vendors, and create a more positive image for new customers and clients.

It’s also important to meet with managers frequently, staying informed about emerging issues that could affect the bottom line. Leaders should also contact financial advisors for help at the first sign of trouble, not months later. Is there too much movement in critical indicators? Which ones are most important to the immediate health of the company? Which ones are crucial to long-term viability?

Developing a key set of financial metrics and following best practices is paramount to financial stability and success. The same be applied to business relationships as well—deals with partners, customers, and vendors should be reevaluated on a regular basis to ensure dealings are mutually beneficial.

MAKING A COMEBACK

While it’s difficult to put precise numbers on how and why a business fails, it’s certain that once problems arise, they can easily get worse before they get better. One study by the Federal Emergency Management Agency estimates that as many as 40 percent of businesses that undergo a crisis or disaster fail to recover.

Knowing what to look for and intervening as soon as possible is the key to overcoming many difficulties, financial or otherwise. Strong business relationships will help too, but awareness, acknowledging problems before they become insurmountable, and seeking help can save a company from failure.

The right partners and the right perspective will go a long way in determining whether a company will be a survivor or a statistic.