Trading factors that can affect business efficiency

Over trading 

Companies can be too successful in generating sales orders and this can result in an unsustainable cashflow position. If sales grow at a faster rate than can be financed from internally generated cashflow and available bank borrowings then the business quickly runs out of cash.

Overtrading occurs when companies pursue sales growth. Margins are cut to generate sales and sales volume increases at a time when the company does not have access to sufficient sources of external funding for the increased level of business. In growth companies, sales volume is clearly a critically important factor. But when companies get into distress, there is a renewed focus on sales volumes, often at the expense of gross profit margins. This can exacerbate cashflow problems. 

Costing and Pricing 

It is essential to know the real cost of producing your product or service. Know what price to set, when to change this price and avoid under-costing - this requires a combination of information and judgments. If prices are too low expenses will not be covered, if prices are too high sales will be lost.

Don’t chase Turnover in this market and indeed use such an exercise as an excuse not to cut costs. There are plenty of examples of businesses dropping prices to maintain turnover but at lower margins which are not sustainable. There is a need to be brave, to not go beyond a level, stay in business, and when the low cost operators have gone bust, you will be around to pick up the business at a price that is profitable. Avoid the temptation to simply cut cost and compromise quality, such an action will damage the long term viability of the business and make it most difficult to recover customers when the market recovers. 

Commodity Price Movements 

Whilst not classed as “Over Trading”, similar problems arise in sectors that purchase or sell commodities such as grain or steel. Commodity prices are items over which management has no control and which can fluctuate widely, often over a relatively short period of time.  As the cost of commodities rise a well-run sales function will pass this price onto customers, profitability is maintained, however the value of creditors, debtors and stock can dramatically rise and thereby creates an increased need for working capital.  A problem also exists in over stocking commodity items, a turn in the market price can result in significant stock losses (or gains).

 Market Changes 

Reduction in demand or changes in the pattern of demand can be important causes of distress. A drop in demand may be a long term trend resulting from changing consumer tastes and social norms or technological developments. A drop in demand may also be a cyclical decline resulting from the regular economic cycles of boom and recession. Seasonal decline in demand is not significant as a cause of failure except when a company is in a weak financial position. Demand for a particular product may not decline but the way in which it is distributed and purchased may change. An obvious example here is the emergence of the internet as a distribution channel. The growth of out-of-town shopping centres is another example. Both product competition and price competition within a market are common causes of decline.

They often occur together and are usually compounded by the dynamics of industry competition. Companies may be slow to develop new products because new product launches have not historically been successful, there is a complacent and misguided belief within the company that the old product is still the best on the market, financial resources to develop new products are inadequate, there is not sufficient technical know-how within the company to develop new products and there may even be a fundamental lack of creative ideas for new products. Severe price competition has been an increasingly common cause of decline in manufacturing industries in recent years as manufacturing has migrated to low cost countries to maintain margins in the face of vigorous price competition.

Industry dynamics are another significant source of competitive market pressure. Those companies which have a sound market focus and sound product focus, good product differentiation and a low cost structure are going to perform better in the industry than are their competitors. Companies which are not able to compete in these areas are destined to failure.

Industry Failure 

Examine the industries and sectors you sell into. If they are in difficulty then an over reliance on them will result in difficulties for you also. Specialization is a good means of marketing your business, but beware of become over exposed. In the current market those associated with property transactions are in difficulty, previously those associated with tourism incurred problems.

Small Customer Base 

Beware of over reliance on a small number of customers. If they go - you go. Broaden your base of activities to avoid relying on one or two large customers or suppliers. The success of the business should not be dependent on one or two people outside the control of the business.

A good business strategy will seek to develop new industries and new customers. There are four segments to such a sales strategy. The easy strategy is based on selling old products to old customers – the more rewarding, but challenging strategy is in selling New Products to Old Customers and Old Products to New Customers, this latter strategy ensure that the business is always developing.

• Old Products to Old Customers

• New Products to Old Customers

• Old Products to New Customers

• New Products to New Customers 

Inability to Sell and Market 

During boom times a business can survive without adequate selling skills. When demand outstrips or just meets supply poor businesses can flourish. However when normal times return, or indeed difficulty times prevail selling skills and sales management procedures are required – the lack of them is exposed and failure can quickly follow.

Management of the sales process involved setting a realistic budget, allocating responsibility for its achievement and concentrate monitoring on reducing the GAP between budget and committed sales.

Companies in decline often exhibit signs of complacency. Nowhere is this apparent more often than when it comes to marketing. Common shortcomings include a lack of responsiveness to customer enquiries and poor after sales service, a poorly motivated sales team, an ineffective advertising spend a lack of market research and poor product development.