My sales in my small sash-making factory are down. Other shops near mine are closing up. It makes me a bit nervous. Is my business on the decline? What should I do to make sure my business is in good condition?
Anna, Metro Davao
What you told us about your problem is very sketchy and not enough for us to make a more or less valid diagnosis of your business condition. You may need a consultant to visit you, check on your operations, including your records to make sure your business is in the clear.
However, there are general symptoms of a declining business (from the Handbook for Women Entrepreneurs by Technonet Asia) which we can share with you and which you can use as guide for starters.
1. Declining profitability – The most direct yardstick here is your rate of return on investment (represented by the relationship between profit and what other total assets or net assets). A rate of return that is consistently and for successive years well below what is achieved by other small firms in the same industry is an alarming signal. A rate of return that is also below the cost of capital constitutes an equally alarming development.
2. Accelerating debt – The level of debt could vary considerably depending on many factors. However, a debt-equity ratio beyond 1 to 1 could spell danger.
3. Declining market effectiveness – An obvious measure is the comparative rates of sales and market growth over time. A persistently declining rate of sales growth against a background of growing demand and expanding market is a clear signal of decline.
4. Preoccupation with the short term – Do you do business planning? Do you have an idea where your business will be in one, two, five years? Not having a long-term vision and long-term plans for growth is cause for worry. Decline situations are marked with a preoccupation with daily or very short-term problems and concerns.
5. Fast worker turnover – Workers and supervisors leaving, resigning, getting sacked (including frequent absences and tardiness) indicates a negative development.
6. Crisis culture – The measure here is a sense of instability and unpredictability of events. The owner’s attention is diverted away from essential business functions and focused on the solution of urgent liquidity crisis. Workers’ morale is down and the search for alternative employment is a major concern to them.
We hope these help. Let us know if you need a consultant to make a survey or a management audit on your firm.