I have been seeing a disturbing trend emerging with both my current and former distribution clients. It seems that these years of prosperity have almost entirely erased the memory of the 2009 recession. Does anyone remember the pain and suffering we experienced during that time? Many businesses saw a 30–40 percent drop in revenue overnight. Even those of us in the advisory business took a beating. I personally saw my revenue cut in half that year. At the rate we are going, are we headed for another mighty fall?
The companies that made it through the recession came out leaner, more focused and operationally stronger than ever before. Percentage mattered. The bottom line was not an afterthought. We played our cards strategically and carefully. Creativity and hunger returned to once bloated entities. Business leaders became street fighters and their employees rallied around them.
Not quite a decade afterward I am starting to see lazy 2008 behaviors creeping back into daily operations. After reviewing sales and operational metrics of friends and clients in the industry, I am seeing a couple measurements that show companies coasting on the winds of prosperity. Sales revenue masks many of these declines. If you simply focus on top-line revenue, which many of my industry friends seem to cling on to, companies are seeing record quarters and years. At a recent dinner, a friend shared that Q2 was the biggest quarter in company history. I didn’t have the heart to ask him how his margins were faring. Leave it to some consultant to ruin the fun. I suspect that the margin dollars were large as well, but his percentage was off. Big tickets with big numbers make company executives think they are really doing a fantastic job running their companies. Instead of patting ourselves on the back, it is time to double down on the fundamentals that got us out of the mud last time.
Gross Margin Percentage
This is one of the first indicators that salespeople have dropped down to a cruising gear. Many of my clients are showing a 1 percent drop in their margin percentage. Folks, this is a bad sign. This tells me that salespeople are more interested in making deals than selling solutions. The term “order taker” is coming to mind. In many of these companies, we have busted our backsides for the past three years to drive percentages up to respectable levels. Gross margin enhancement has been the hottest topic in the advisory world for several years now. We simply can’t afford to go backward. At the risk of sounding redundant, the impact of a 1 percent reduction to margin can be devastating to the bottom line.
Lines Per Order
When we see a reduction in this metric, I know that the salespeople are shifting to order-taker mode. This is especially true for inside and counter professionals. Adding complementary items to an order is not only beneficial for the company, it is also a tremendous labor-saving benefit to the customer. When salespeople let the customer walk out with only what they requested, they have failed to provide superior service.
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New Credit Applications
How many new customers did you put on the books last month? A former client likes to track both the number of new applications and the number of companies exceeding $500 per month in gross margin. He got burned pretty bad in 2009 and he doesn’t want to see all his eggs in one basket. As the revenue increases and commission checks get larger, companies will see fewer new customer applications. Reliance on large customers, who may be highly leveraged, is a recipe for disaster. When was the last time you checked the credit worthiness of your “key customers?”
Accounts Receivable
Are you starting to see customer payments slowing down? Perhaps it’s only a week, but that just puts more strain on your cash flow. I understand that interest rates are low and tapping the line is less painful, but it is not something we want to rely on. This trend of slow payments is not the result of customers having less money. Many of them are seeing record growth as well. It is simply a result of relaxing their practices. We need to remind them that superior service requires prompt payment.
Inventory Turns
This metric is near and dear to my heart. When was the last time you evaluated the inventory levels at all your locations? Are you turning product at an appropriate pace? Don’t allow inventories, especially in the branch locations, to get bloated and stale. In times of prosperity, we see inventories grow disproportionately. As salespeople shift to an ordertaking mentality, they want to be all things to all people. As you know, this is really expensive. Don’t let the exuberance of salespeople drive you to mismanage your cash. Watch the dead and slow inventory. Just because you can afford it doesn’t mean you should have it. Invest heavily in the products your customers want on the shelves and minimize the “just in case” inventory.
Get back to basics, folks. The practices that pulled you out of the recession will be the same strategies that bolster you for the next downturn. Don’t let this wave of prosperity turn your sales teams into a bunch of order-taking, cherry-picking, big-ticket hunters. Help them refocus on selling value, not truckloads of product. We all know that this boom can’t last forever. I urge you to take a long-term approach toward the health of your organization. Don’t take your foot off the gas and remember, you only coast one way. Good luck and know that I am always here to help.