Establishing an Early Warning System
The most detrimental outcome for any business is a gradual decline in sales over time. By the time you realize there is a problem, it may be too late to rectify or even identify the root cause. Conversely, facing a sudden revenue drop due to a crisis, such as the loss of a major customer or a rapid decline in demand, can often be easier to navigate as you can quickly determine the necessary steps to take. The earlier you become aware of issues in your business, the faster you can address them and fortify your operations.
Therefore, the first step towards building business resilience is identifying the key factors that drive your operations and implementing a series of red flag indicators to prompt action before it’s too late.
Identifying Your Drivers
Sales revenue typically serves as the primary indicator of a business’s performance. An early warning system could help to shed light on any underlying drops.
Sales drivers and their associated challenges may include:
- Acquisition—a decrease in calls, inquiries, demos scheduled, meetings booked, or foot traffic.
- Retention—customers are willing to switch to competitors easily for better pricing, products, or rates.
- Average sale—an increase in competition with cheaper alternatives and discounting practices.
- Gross profit—rising costs or selling lower margin items.
- Web traffic and leads—distracted customers leading to reduced engagement.
- Conversion—a decline in the percentage of customers purchasing compared to leads generated.
- Accounts receivable—customers who consistently pay late causing a blockage in your cash flow.
- Unhappy employees—increase in sickness, absenteeism, or staff turnover.
- Social media participation—decreased relevance and engagement.
Each industry will have its own unique characteristics that may not be directly tied to immediate sales. For instance, builders could monitor new building contracts, retailers can review inventory turnover, manufacturers should keep an eye on wastage or returns, professionals must stay up-to-date with new regulations, farmers closely monitor market prices, and so on.
Setting Red Flag Indicators
Data automation can help with measuring and setting thresholds in order to identify and alert the business to pertinent information. If an indicator drops below a certain level, this would be an opportunity for the business to investigate the root cause.
Accounting software can also streamline financials, making it easier to monitor buying trends, cost of goods sold, gross profit, lifetime value, and product or service costs. Additionally, you can leverage marketing CRM software, search engine analytics, and social media platforms to detect any signs of slowing demand.
Action points to consider:
- Decide which drivers you want to monitor closely.
- Set thresholds that will alert you to potential concerns.
- Decide on the frequency of your reviews.
- Involve others to provide objective insights and keep you accountable.
- Ensure that your customers are at the heart of your business strategy.
- Continuously strive to improve your net profit margin.
By implementing an early warning system and taking proactive steps to address issues, you can ensure the success and resilience of your business in the face of challenges. Stay vigilant, monitor your key drivers, and make data-driven decisions to stay ahead of the curve.
Calculator on top of financial report
Cash Flow Forecast TemplateStay ahead of unexpected expenses by regularly monitoring your business's cash flow, allowing you to plan with confidence.
Store owner handing bag to customer at checkout
Customer Lifetime ValueUse this template to calculate the long-term value of each customer, while considering acquisition costs and ongoing marketing expenses.
Female small business owner using laptop
Unlock the Cash in Your BusinessIf your business is facing a shortage of cash, the solution may be closer than you think.
Here are some tips to help you uncover hidden funds and tap into their potential.