Closely Watched Trends
This new year is starting out with more uncertainty than most. Interest rates could go either way. The business consequences of tax reform are only beginning to be understood. There's talk of a sputtering economy and possible recession. There's also talk of continuing expansion and possible boom times. Depending on the area of the country and the industry you are looking at, there's evidence of both boom and bust.
With the economy throwing off such mixed signals, it's critical to have systems in place that give you early warning of trouble spots in your operations. Without such systems, you're walking in very dangerous territory. Consider, for example, the case of a $1.7-million video-supply company we know. One Friday morning last year, the company's bookkeeper suddenly realized she couldn't meet that week's payroll -- or the bank-loan payment. The panic-stricken chief executive officer had little choice but to call his banker with a plea for an immediate infusion of $50,000 into the company's credit line. Not only do bankers dislike surprises, but this particular one had heard from the CEO only two days before that purchase orders were up 25 and that, in short, "things were fine." The banker was far from willing to increase the credit line, and it was hard to argue with his reasoning: "If you had anticipated your cash needs -- and you should have -- I could have helped. I'm afraid we'll have to call the loan."
Anticipate is the key word here. If the CEO had had even the simplest of monitoring systems, he could have foreseen his cash problems and averted the crisis. As it turned out, the company did square things away, but only with drastic layoffs and other cutbacks.
In today's business climate, the likelihood that small companies will be trapped by similar "surprises" can only increase. Many things, of course, are outside the control of a single company, but if you monitor nine basic areas, you'll be in a much better position to head off trouble before it develops. For convenience, we've grouped the areas according to the management concepts they represent: finance, marketing, and production. While the categories themselves are by no means startling or novel, the idea is to update each one weekly so you can spot trends as soon as they begin to creep into your operations.To get a quick visual idea of how things are going, you may find that setting up a series of graphs is your best bet (see below). You'll then need to take no more than 10 or 15 minutes a week to get a clear picture of your company's progress, problems, and prospects. It's the sort of information your bookkeeper could easily track -- and have on your desk every Monday morning (so as not to spoil your weekend).
Cash on hand
Cash, of course, is your company's lifeblood. You can be drowning in orders but at the same time be experiencing a deteriorating cash position. A downward trend in cash can be the sign of any number of potential problems, including a stretching out of receivables, a drop in purchase orders, crumbling sales performance, or an inability to fill orders. At the first sign of trouble in your cash accounts, you'll want to check receivables, purchase orders, and turnaround times so you can pinpoint the source of the problem. As the video-supply company sadly learned, the day you run out of cash to meet the payroll is not the day you can expect your banker to be sympathetic. If, however, you're able to anticipate cash needs, you'll find that the chances of increasing your credit line will improve. Upward trends in cash that aren't traceable to seasonal factors may mean that it's time to consider expanding your operations.
Rising expenses usually go hand in hand with rising sales, but expenses often keep mounting even after sales have begun to taper off. It's important, then, in your weekly checkup, to compare expenses against purchase orders. If expenses are still on their way up while purchase orders are leveling, you'll know that it's time to do some belt tightening or at least hold back on further expansion.
Lengthening receivables are an insidious problem in many small companies. Because you're likely to be preoccupied with a dozen other pressing problems, you can be caught off guard by customers who gradually take longer to pay their bills and thereby rob you of cash. To make sure you'll have adequate warning, you'll want to follow three trends: one, the weekly receivables for 30 or fewer days; two, the trend for 30 to 60 days; and three, for more than 60 days.
Inquiries are a good measure of how successfully your company is promoting, advertising, and selling, and it's surprising that many companies don't tally them. For service companies, in particular, the number of inquiries is an important guage of future business. An interior-design company or personnel agency, for example, may be overworked with current projects or clients but may still face a sales decline if it isn't continually attracting new prospects.
As obviously important as purchase orders are to the health of a company and as easy as they are to monitor, they often begin slipping without anyone noticing. If you are a manufacturer with accumulated backlogs, or a service company in the midst of long-term projects, it's easy enough to forget how vital new orders are. A weekly update forces you to pay some attention.
A sharper-than-expected rise in orders means that you should consider stepping up operations to meet the demand and counter potential backlog problems. A leveling off or decline may be your first hint that an industry slump or a recession is on the way. Or it could signal you to take a hard look at your company's sales efforts.
The conversion ratio -- purchase orders or contracts divided by inquiries -- measures your effectiveness in converting inquiries into sales. A decline in the ratio can mean that your promotional efforts are being directed at the wrong market. The promotion is drawing people to your company, but evidently not those who need your product or service. A decline can also mean that your sales force isn't closing on enough prospects. If the quality of inquiries improves or the sales force does a better job, that will show up as a rising trend on the conversion graph.
The conversion ratio is a significant barometer of future prospects and should be checked against both inquiries and purchase orders. If inquiries are increasing at the same time the ratio is falling, prospects aren't being converted into customers at earlier rates, which will mean trouble if inquiries should decline. When the conversion ratio increases while purchase orders remain the same or even decreases, chances are that your company isn't getting the message out about its product or service and that you'd do well to pick up your marketing efforts.
Most companies don't bother to monitor turnaround time, that is, the average amount of time from when orders are written to when they are shipped -- or completed, in the case of a service company. But a rising trend can spell trouble ahead. As purchase orders pour in, there's no better way to alienate customers than to take too long to fill the orders. Also, the cost of production is directly related to the length of turnaround time. When turnaround time increases, both wages and material costs per item are likely to rise, which means that potentially profitable sales can turn into losses.
For service companies, if it's taking longer and longer to complete projects, the problem may lie in managing the people who are fulfilling the contracts. For manufacturing companies, an extended turnaround time may signal trouble in managing the production area. It could also mean a problem with backlogs or delays in receiving supplies, areas described below that should be charted separately.
When orders are simply coming in faster than your staff can handle them, you have a potential problem with irate customers and canceled orders on your hands. But, by charting the average number of unfilled orders on a weekly basis, you will be able to spot the rising backlog early enough to make whatever adjustments are necessary. A Chicago training company we know has dealt with its backlog problem by keeping one trainer who is not fully booked on staff so the company can handle new orders, keep its backlog in check, and preserve customer goodwill.
Time required to receive ordered items
This is another category that often goes unmonitored: the amount of time between placing orders for supplies and receiving the goods. If your turnaround time is rising, it could be because a key supplier is falling behind on deliveries. By monitoring average delivery time of your main suppliers, you may discover that a supplier is having its own problems and you are being hurt as a result. If that is the case, you'll at least know what's causing the delays, and you can explore other ways to get your supplies when you need them.
The checklist by itself will not get you very far. The real value in the technique, if you are to correct potentially serious problems before it's too late, comes with regularly monitoring the items.