How to anticipate and prevent a downturn in profitability.
Timing. That’s what it’s all about when it comes to tracking potential downward trends as a small business owner. One of the advantages small businesses have over big businesses is their ability to see results immediately. However, this takes persistence and dedication to review and tracking your numbers daily, weekly, monthly, quarterly and annually.
The one key takeaway from this article is the following: If you see something troubling, take action immediately. It could be that you need more capital to make more investments or it could mean you just need a big sale to propel you out of the slump.
By definition, a trend is determined after three months of consistent responsiveness. If you have three months of growth, you’re in a growth trend. The opposite is true with decline. The problem appears when small business owners fail to recognize those downward trends right away. They wait, and wait, and wait, thinking it will get better. This is a dangerous supposition, often leading to a downward spiral that becomes harder and harder to reverse, gaining momentum until it’s nearly impossible to stop.
The smart way to get out ahead of this is by nipping the situation in the bud as soon as you see the numbers leveling and trending down. The sooner you do it, the healthier your company will be and the more resources you have to throw at the problem before it seizes control over your company. Here are some tips:
1. Act Now
Any downward spiral starts with a failure to act. It’s easy to feel paralyzed in the face of uncertainty. But this failure to respond to the situation playing out before you is foolish and can harm your company irreparably.
Inaction is the death knell of many small business owners. They may see a downward trend beginning but decide to wait it out, and in the process, they erode their cash, the negative impact gets deeper and becomes harder to turn around. By the time they finally decide to do something about it, they have become severely limited in their ability to do so.
Small business owners essentially lose their advantage because they wait. Their reasons for waiting are varied. They wait:
- Just because
- Because they didn’t recognize the downturn soon enough.
- Because they don’t want to invest the capital.
- They do not know what to do.
The key is to jump on that downturn immediately and fix it. Why wait for it to become an official trend at the three-month mark?
Nipping it in the bud and doing what you should be doing anyway (increasing revenue enhancing your marketing) won’t hurt. In fact, it can only help. And by boosting your reaction time, you’re heading off a potential disaster instead of
being paralyzed by inaction.
2. Track the Numbers
One of the beauties of small business is its ability to turn on a dime. They can
make a decision today, implement tomorrow, and see results almost immediately. Big businesses don’t have that same luxury. It can take two years to create a new model, which is challenging and takes time.
Small business owners have the ability to change quickly on their side. Here are some takeaways:
- Track numbers constantly (daily, weekly, quarterly, annually).
- Determine micro movements that indicate a trend on the way.
- Respond to those movements immediately and vigorously.
- Do not ignore them.
- Evaluate and make a decision to reverse the downturn to increase
- Come up with a plan: maybe you need more marketing, better pricing,
a sale, more salespeople. Whatever it is, put that plan in motion
When faced with hard facts and numbers, don’t do the same and simply hope for a change. Some outside pressure has forced that downward trend. Business owners who track their numbers daily will begin to see micro movements very shortly — long before the three months are up.
3. Recognize Potential Downward Revenue Trends
You may see a leveling of your revenue, but it’s either going up or down. Leveling never stays neutral. It’s like a scale, tipping one way or another with pressure on both sides. For example, if you suddenly see flat numbers and can’t explain why, you may notice as you move through the month that a decline has happened.
There are key indicators here that you have to read and interpret to stave off a downward spiral.
By the next month, if the numbers don’t improve, it’s time for action. Don’t wait for the downturn to solidify itself and lose 20 percent more revenue. The sooner you react, the more resources you will have to combat it. The longer you wait, the harder that trend becomes to reverse.
It’s important to note here that leveling isn’t always bad. Sometimes, it can turn up. Perhaps all you need is more inventory or more production to get the numbers to swing in your favor. The point is, you must answer these questions right away and evaluate what the numbers are telling you, then react immediately.
“Planning, tracking and managing all of your financial metrics is vital to your business’ long-term success,” says Inc.
Without an understanding of what normal and healthy fluctuations in your financials look like, it’s hard to spot problem areas quickly and fix them before they get too big and start threatening the health of your business.
Bottom line: don’t wait until it’s too late to take positive action. Reacting immediately will put you ahead of the game so you can regain that precious balance and begin trending upward again.