Watch for Warning Signs: 7 Red Flags Every Business Should Be Aware Of

By ugh
Business.com / Strategy / Last Modified: February 22, 2017

Be vigilant for signs of potential future problems.These are warning signs for a business that might be in trouble.

Even if business is fine, a company should always be vigilant for signs of potential future problems.

By spotting possible issues farther in advance, management can take action to prevent or minimize problems and the corresponding financial pain.

Here are seven easily observable warning signs that indicate a business might be headed for tough times if some adjustments aren't made.

1. Red Flags Hinting at Upcoming Problems Collecting Payments

A fundamental aspect of maintaining adequate cash flow and profit is being able to collect payments that are owed to the business. If one or more of your clients shows red flags of potential collection problems, you need to be cautious about the amount of credit extended and recognize they may not be a customer much longer.

Further, if their account goes delinquent, you need to give this consistent attention and act swiftly. Invoices that go unpaid for 90 days past due only have about a 75 percent chance of being paid, and by six months this is down to 50 percent. Credit managers typically assign claims to collection agencies that work on a contingency basis when an account hits three months past due. They know that taking special action quickly minimizes losses.

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2. Excessive Advertising Costs for Minimal Returns

Successful marketing efforts are critical for most businesses. But there is no guaranty that a traditionally effective advertising approach works forever. Fortunately, it is relatively easy to monitor statistics on digital marketing efforts to spot changes and maximize the return on your marketing investment. Marketing professionals regularly watch the cost per conversion of each campaign and look for ways to optimize performance.

They will do limited experimentation in a search for more effective opportunities. If a negative trend is identified early, the company can make adjustments to its marketing budget, switch spending to more effective programs, or plan for a potential revenue decline. If you're already throwing away capital on less-than-ideal outreach efforts that's a clear sign that you're headed in the wrong direction.

3. Declining Industry-Related Trends

When the Internet arrived, there was no way to save decades-old businesses based on selling printed encyclopedias. But those that spotted the trend earliest had the best chance of surviving this decline and pivoting to new opportunities. Other companies are tied to products and services that may have only limited time in high demand.

Companies can establish procedures to pay attention to how well their industry’s product or service is trending. Recognizing subtle movements like this can give you time to prepare a plan that will keep your revenue respectable by capitalizing on other trends or developing a sales strategy that doesn't depend on trends as much. Fortunately, monitoring trends is a relatively easy process if you know where to look.

4. Frequent Complaints and Negative Reviews

Even if your company is winning overall with plenty of sales and a profitable business model, having a high ratio of complaints or negative reviews is never a good sign. A few bad apples can spoil the bunch and leave prospective leads with a bitter taste after researching your business.

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To ensure that you remain an appealing option, you'll need to address customer complaints and remedy situations that have resulted in negative reviews. Monitoring your company's online reputation is a great way to gauge this warning sign in detail.

5. Significant Increase in Competition

Many businesses have had to deal with the consequences of over-saturation, losing entire fractions of their market to a sea of opportunistic newcomers who are looking for a slice of the pie. Being able to realize when there is not enough pie to go around is imperative, as is protecting your own slice when it is clearly being encroached upon.

One of the best ways to circumvent the challenge of competition is to focus on setting your company apart from the crowd with unique features that can't be found elsewhere.

6. Declining Conversion Rates

The conversion rate is the percentage of leads who complete the desired action (i.e. buying an item, signing up for a service, filling out a survey, providing an email address, or subscribing to a newsletter). A declining conversion rate is a sign of a serious problem. It could be related to several of the items mentioned above, such as advertising, competition, industry trends or negative reviews.

But it may also be related to internal operating issues that may not be readily apparent. Prompt attention is required to determine the cause and find a solution or the outcome could be catastrophic.  Luckily, there's no shortage of guides that will teach you how to assess and raise conversion rates.

7. Low Ratio of Returning Clients

There have been cases where companies do well off of the initial boom, attracting hundreds or thousands of customers at a rapid pace, only to have a small percentage of them become repeat clients. Even if you're making plenty of sales right now, be sure to pay attention to the ratio of customers who choose to come back for multiple transactions, as that stat will give you a more accurate indication of how successful the business might be in the long-term.

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How to React in Time

The problem that most managers and owners have when their business is failing is that they won't accept the severity of the situation until it's too late. Don't wait until the above warning signs have materialized into full-fledged problems. Instead, take a proactive approach and use negative statistics to fuel and inspire improvements in every area of operation.

The key is to make corrections at the first sign of anything being amiss, rather than trying to fix a loss in revenue after the issue is too big to ignore. Ultimately, reacting in time is more about preparation and risk identification than last-minute rushes to solve problems that should've been handled before they became actual problems.

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