Developing an early warning system

The sooner you know something needs fixing the earlier you can remedy the issue and the stronger your business will be.

The absolute worst-case scenario in a business is when sales slowly erode over time (death from a thousand cuts) and it becomes too late to fix the problem, or you don’t know what the issue is. It’s possibly better to have a sharp revenue shock from a crisis (loss of a major customer, rapid falling demand) as it can be easier to decide what to do.

The first step towards business resilience is therefore identifying your business drivers and setting a series of red flag thresholds to trigger action before it’s too late.

Identifying your drivers

Sales revenue tends to be the main indicator of how well a business is doing (which we assume you check regularly), but an early warning system helps measure why the drop.

Sales drivers and their issues can be:

• acquisition (fewer calls, queries, demo’s, meetings booked, foot traffic)
• retention (more customers switching to competitors)
• average sale (cheaper competitors and discounting)
• gross profit (increase in costs or selling lower margin items)
• web traffic and leads (distracted customers)
• conversion (fewer customers buying as a percentage of leads)
• accounts receivable (customers paying late)
• unhappy employees (increase in sickness, absenteeism or staff turnover)
• social media participation (less relevance).

Every industry will have its own specific characteristics and may not be linked to immediate sales. Builders could monitor new building consents, retailers review inventory turnover, manufacturers check wastage or returns, professionals keep up-to-date with new regulations, farmers keep an eye on market prices etc.

Setting red flags

Automate data you want to measure and set thresholds (such as new customers drop 10% or more in a month). If an indicator drops below a certain level, this triggers to investigate why.

Accounting software will make it easier to monitor buying trends, cost of goods sold, gross profit, lifetime value and product or service costs. Marketing CRM software, search engine and social media platforms will help detect a slowing of demand.

Action points

• Decide which drivers you want to monitor
• Set thresholds to trigger concern
• Decide how often you want to review
• Involve others to keep you honest
• Ensure customers are central to your business
• Always look to improve your net profit margin.