Strategists, Equity Investors

  In today's tough economic climate, how do you determine whether your firm or a client's firm is healthy or headed for trouble? We ask clients to answer ten questions.

Whether you serve on a board of directors, own or manage a company, you face significant business risks. All of the stakeholders accept additional risk when the company is heading for trouble. Balancing these risks can cause a predicament. By recognizing some early warning signs that indicate business trouble on the horizon, you can eliminate, overcome, or, at the very least, side-step many of those risks.

When a company is in trouble, the rules change. Management is often "out of its element;" it is entering untrodden ground. People haven't had to manage in this environment before. Why will they succeed now? The odds are that they will, at the very least, have difficulty.

Time and again, the obvious signs of business trouble are rarely its root causes. Losing money, for example, isn't the problem. Rather, losing money is the result of other problems.

Here are ten common signs that a company is heading for trouble. Carefully consider whether or not they apply. If you can answer yes to any of these questions, its time to do something about it.

Recognizing trouble requires no hocus-pocus. The signs are there, if you look for them.
More than likely, you'll discover two or three.

Early Warning Signs Pinpoint Business Troubles
The Sign of Trouble	What You Can Do About It
Is the owner or top management over-extended? Whose work are they doing? When they continue to perform functions that should be done by others, they're over-extended. They should do the work for which no one else is qualified.	Delegation is key to dealing with overextension. Define the owner's and key managers' jobs to clarify role responsibility. Assess subordinates' competence; retain them if appropriate -- replace them if not. Monitor key metrics so you'll remain informed about conditions ... without being immersed in them. Relationships of how the numbers behave tell the story. Look at 'volume in' (revenue/sales), particularly where and how revenue is generated. Look also at 'volume out' (throughput/production), particularly getting the product or service "out the door". How else can you bill for it?
Is the turnover rate excessive? A sure sign of underlying problems. This condition can be the result of a faulty hiring process, inadequate training, poor management ... the list goes on and on. The price for ignoring this problem is high: low morale, lost wages, recruiting costs, lack of productivity, and ultimately, forfeited business.	Uncover real causes early on, and rectify them. Clearly define job responsibilities, performance expectations, rewards, and scope of authority. Concentrate several levels of management attention to new employees (and those moving to new positions) during the initial days of the assignment. Talk to employees, but more importantly, listen to what they say. Employees know when problems exist.
Are communications ineffective? Ineffective meetings, management information, or interdepartmental coordination can destroy a business from the inside out, even as it is growing. If all that's accomplished during "bull sessions" is a lot of ... well, "bull" . . . then the blame rests squarely on the shoulders of the leader of the meeting.	It's a leader's duty to limit the scope of topics discussed, to establish an agenda -- with specific begin/adjourn times -- and stick to it. Limit participants too, not everyone needs to be involved in every topic; what a waste of time and productivity. Demonstrate organization by managing your meetings and your team will demonstrate that organization by managing your company.
Are goals unclear? Chronic failure to achieve stated business goals suggests a problem far more serious than a lack of performance. Often, it implies a lack of clarity regarding the owner's goals. Business and personal goals must be in sync. Failure to achieve business goals also indicates a failure to secure management team "buy in."	Take a hard look at the goal-setting process. Set goals and hold managers accountable for success. Goals must be clearly articulated and agreed upon. What is the company's goal? The mission statement should be a directive that states this goal. What usually comes through is "... we are the best at providing everything to everybody which doesn't say anything." Set a mission statement that tells customers, employees, and stockholders where the company is headed. If it can't be articulated ... does it really exist?
Are compensation and incentive programs yielding unsatisfactory results? While it seems obvious that programs should clearly and directly reward for successful job performance, it's remarkable that many companies unwittingly set up compensation structures that reward performance altogether differently from that outlined in the job description. A word of warning, if this is your practice: Be careful what you pay for -- you might just get it.	Managers paid incentives based upon gross margins are more effective than those paid on gross sales. Because they share the burden of poor performance, they're more likely to take corrective action when faced with substandard performers! Set rewards for performance to attain the plan, pay for performance when achieved, and don't pay for it if not achieved.
Are any key client relationships deteriorating? Determine if a decrease in business from long-time customers is due to poor market conditions in their industry or poor service from you. If it's you, you're probably no longer meeting the customer's needs. Worst of all -- you may not know.	Manage customer relationships, carefully. Customer needs, like your own, change. Give specific responsibility for nurturing customer relationships to all levels of management -- not just to those within the sales force. Talk with the customer. Few customers will call to tell you that they are not going to buy your product any more, they just stop writing checks.
Is new business waning? If the operation can't win new business at expected levels, it's out of touch with the marketplace. High prices, unresponsive proposals, and giving more than is required of you are typical answers to the question ... Why does this company lose bids?	Commitment to winning new business is essential to your success, so it's crucial that you identify targets early on and influence specifications whenever possible -- always keeping a close eye on the customer's special needs. Bid to win, then manage for profit and growth. Remember, a dollar must be a dollar of revenue before it can be classified as any other kind.
Does the company create "products in search of markets?" Markets and competitors must be properly analyzed. Disciplined self-analysis is needed. Products or services developed before market needs are assessed can waste resources and be difficult to sell.	It's less expensive to create awareness of a product or service that meets an existing demand, than to develop a market for products or services that doesn't exist. Identify how your key competencies satisfy customer needs and produce benefits. Ask your customer ... simple but effective.
Do financial and management reports cover the wrong information at the wrong levels? Financial and operational reports must be accurate, timely, and pertinent. Many businesses are managed on a P&L performance basis, rather than on the basis of cash flow or new business generated.	Cashflow is the best indicator of business health. Information is often prepared at the wrong level, making it difficult or impossible for management to know what's going on inside their operations. Prepare forecasts, then manage to them. Determine performance at each level of the business, and update often. Disseminate timely information, hold managers accountable. Manage to each profit or cost center, each cash center, each major element in your incentive plan. If they can't see it -- they can't manage to it.
Does the operation have a track record of failed expansion plans? Set-backs drain businesses of cash, time, and morale. When companies fail in one effort, management tends to "pull in their horns" the next time out. Efforts fail because of inadequate cash, management, lack of thorough market analysis, or improper control systems.	Anyone who runs independent or remote operations must be adept at problem solving, decision making, team building, and managerial analysis -- skills which are not obvious. Understand why you're successful in your present marketplace, and try to "model" those conditions in a new marketplace.

What Have We Learned? After examining these early warning signs, perceptive business people admit that recognizing trouble requires no hocus-pocus. The signs aren't always neon and blinking, but they are there, if you have the courage to acknowledge them. Likewise, solving trouble's accompanying problems takes no smoke and mirrors. If misery likes company, then trouble loves it; problems can multiply at a frightening speed. Learning to identify the symptoms of trouble early on teaches us that seldom is there only one reason for business troubles; more than likely, you'll discover two or three.

The balancing act becomes weighing the risk(s) and taking action versus letting the status quo dictate a troubled course.

One thing's sure: the longer you wait to admit that the company is heading for trouble, the more difficult the resulting problems will be to solve. Getting to the real issues is the catalyst toward change ... and recovery.

Which is always a much more acceptable risk.

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John M. Collard, Chairman, CTP
Strategic Management Partners, Inc.
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Annapolis, Maryland [MD] 21403
Voice 410-263-9100 Facsimile 410-263-6094 E-Mail Strategist@aol.com

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