The decline & recovery curve – Step 2 - Underperformance

Published: 23/11/2020 By Jane Price

Unless there is a sudden and catastrophic disaster like a sudden loss of key staff, a new competitor with a better or cheaper product, early signs of underperformance can be difficult to spot.

It is entirely possible for a business to trade, apparently successfully, while things go wrong under the surface.

This is where key success metrics are important.  Owners and managers should keep a close eye on the metrics that have been set for their own business.  Early signs of a problem can include:

  • a lower-than-expected bank balance 
  • use or increased use of an overdraft  
  • lower profit margins 

These problems can indicate costs of production or overheads rising faster than revenues which can be managed for a short time if the business is aware it is happening.

If inflation forces up costs, or exchange rates move to make components more expensive, action might be needed to maintain margins.

Businesses with lots of debt need to watch interest rates.  Research shows that many businesses would be unable to service debts if interest rates were to rise.

Even owners without a grasp of key metrics often get a sense that things aren’t going well before they see flaws in the business.  The business might feel ‘under the weather’.  It might be nothing serious or it might be the start of something bad.

The best advice is always ask tough questions and always act early.  If problems are known, owners can act.  More often it isn’t simple but getting support early is better than waiting while things get worse.  Liquidity or cash flow problems rarely fix themselves.  Finding the cause is vital, as is understanding differences between a symptom and root cause.  This is one way a licensed Insolvency Practitioner or other trusted advisor can help.

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