Overview
Everything we own requires maintenance at some point in its life, something we often forget to provide, leading to an early failure of the item. Fortunately, our cars have warning lights to remind us of basic necessities like “low fuel,” safety issues like “tire pressure low,” and convenience items like “windshield washer fluid low.” Many newer ones tell us when it is time to change the oil or have other maintenance performed. Most healthcare providers remind us to have an annual checkup, to catch any upcoming issues while symptoms are minor or non-existent, in order to avoid any long-term or irreversible damage to our physical well-being. Even my home thermostat has a “replace air filter” warning to ensure that my system is operating efficiently.
Unfortunately, as businesses lack such periodic reminders, it is up to the business owner to “look under the hood” occasionally and see if the business needs a “tune-up” or adjustment in order to continue to operate with peak performance. There are many external factors that change and result in a need to adjust the business accordingly. Business owners should conduct a quarterly (best in a volatile economy), semi-annual (better than annual), or annual review of these and make appropriate adjustments in their business.
External Factors
Some examples of external factors and the types of adjustments that will result from changes are:
Customer buying habits change
Aside from any changes in sales levels, are customers buying different products or services, different sizes, or different brands? If this appears to be a trend, purchasing or service offerings will need to be adjusted.
Terms on credit card processing or bank account charges change
This should prompt a review of the current provider’s service and comparison to alternate providers. It may be beneficial to change, or at least to ask the current provider to match the costs of their competition.
Prices of components in the “Cost of Goods Sold” change
A review of sales prices, competitors’ prices, and alternate vendors is called for. The results of that review will determine potential corrective actions. While a business must remain competitive, the inability to pass price increases along will result in a lower gross margin, lower profit, less ability to service debt, and reduced capital available for expansion.
Changes in sales levels, up or down
Should prompt a review of inventory levels (carrying too much inventory will reduce profit, carrying too little may cause customers to buy from the competition when you run out). Changes in sales levels should also trigger a review of the marketing and advertising plan. One or both may need to be increased or decreased, “freshened” with a new campaign, or directed (at least in part) to different media as customers’ buying habits change.
Significant changes in sales levels
This indicates that a review of employee numbers or hours should be made. The ratio of sales dollars to employees should, for the most part, be constant. Overstaffing will reduce profits and understaffing can affect customer service and ultimately sales. It is not necessarily a requirement to hire or fire staff to make adjustments. On the contrary, that should be a last resort as current employees have skills and company knowledge that are strong assets to the business. Hiring new employees will temporarily reduce the productivity of others as the new employee will have to be trained. Downturns may be able to be handled with reduced hours and upturns with overtime. Both of these actions will allow maximum flexibility in response should conditions level out or reverse themselves.
Interest rates change
Especially if they are indicative of a sustained upwards or downward trend, changes in interest rates should encourage a review of business credit and loans to determine if this is the time to increase or decrease borrowing activities.
Annual Review
On an annual basis, a review of company infrastructure should be conducted. Items in this review would include:
The Physical Plant
is the location of the business and the space within that location still appropriate? What is the condition of equipment and machinery including the heating and air conditioning system? Does the building need any repairs (either as owner, leasehold improvements, or landlord’s responsibility)? If vehicles are owned by the business, do they need repairs, replacement, or refurbishment (including painting or wrapping of trucks so they don’t appear old and worn)?
Employees
Is compensation, including benefits, competitive? Is your benefits provider competitive, or is a change needed? Are company policies (holidays, sick days, vacation, use of company vehicles, etc.) up to date and adequate? If ongoing employee training is offered, are the programs still relevant or do they need updating?
Legal Structure
Given any changes in tax law, personal exit plans, family status, and the like, is the current corporate structure still appropriate, or does it need to be modified? Do contracts and other legal documents need to be updated to reflect changes in law or business activity? Are all the corporate documents up to date and in order?
Insurance
Is all coverage adequate and cost-effective? Do any declarations of assets need to be updated? Is all contact information up to date?
While examining your business, consider a financial performance review that will determine how your company’s financial ratios compare to similar companies. Are you in the top 10%, top half, or out-of-the-ballpark? Do you remember the adage, “You can’t get to where you want to go if you don’t know where you are starting from?” Knowing how your business is performing will show you what might need to be adjusted.
Business Continuity
Also, consider business continuity in your review. If your business establishment was destroyed by a storm or fire, could you restart the business fast enough to avoid losing your current customers? Replacement insurance alone is not sufficient. You will need some loss-of-income insurance to provide working capital, a pre-determined alternate site to operate from, and off-site backup of all your customer, vendor, insurance, and financial records. While considering business continuity, consider your personal importance to the business. If you were incapacitated in an accident, can others run the business until you return?
Achieving Peak Performance
Periodically checking your business’s condition and making any needed adjustments will enable it to achieve peak performance. If you fail to do so, you may be all right in the short term, but run the risk of having the business “miss fire” just when you need to “step on the gas” to remain ahead of the competition.
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Filed under: business strategy, Customers, Employees, Market Research, Sales by Small Business Resource Center Wednesday, July 6th, 2022
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