Identifying and preventing underperformance
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Any business, even if it is deemed to be well managed, is capable of improving its performance. Similarly, a business may find that it is underperforming, which could eventually threaten its survival.
To counter this risk, a business manager can make use of a set of tools to identify and prevent underperformance in his business.
Who is concerned
Any natural or legal person carrying out a commercial activity can find that they are underperforming.
The following types of business are particularly exposed to such difficulties (non-exhaustive list):
- young businesses;
- single-activity businesses;
- businesses operating in fields characterised by rapid technological change (risk of product offering becoming obsolete);
- businesses that have undergone an unexpected change in the management team;
- businesses that have suffered an unforeseen loss of key personnel;
- businesses in a sector that has been hit by negative economic conditions.
How to proceed
Golden rules
To prevent underperformance, the business manager must take proactive measures throughout the life cycle of the business.
He must identify and correct weaknesses in the light of specific indicators, while respecting certain golden rules:
- look ahead: do not wait for problems and difficulties to arise;
- stay informed: recognise the importance of regularly monitoring and controlling commercial activity as well as the business's finances;
- communicate: maintain clear, regular dialogue with all stakeholders in the business such as suppliers, customers, banks and employees;
- analyse: be aware of all the information and figures stemming from commercial activity, accounting and the business environment;
- make use of specialists: if necessary, obtain the assistance of a professional to carry out an objective assessment of the business.
Each type of business and each sector faces different issues and has its own performance indicators.
Although technical problems specific to certain industries or businesses are a significant source of risks that could lead to underperformance, here we will only deal with general performance indicators that are valid for all business types.
Business managers are therefore strongly advised to consult specialists to carry out an in-depth review of their business's performance.
Strategy and commercial aspects
Lack of a defined strategy
Certain businesses do not have a clearly defined vision of their ultimate goal. Consequently, they adopt a reactive or even passive approach to competitive and market pressures. "There is no favourable wind for he who does not know where he is going."
Businesses must clearly define their ultimate objectives and the strategy to pursue to achieve them.
Poorly-defined or non-existent strategy in terms of tangible objectives
Some businesses have clear ultimate goals, but the path to achieving them is poorly mapped out.
Businesses must define precise intermediate objectives which, if achieved, will enable the ultimate goals to be achieved.
Business monitoring deficiencies
Some businesses do not gather or do not make sufficient use of data concerning transactions with their suppliers and customers.
Businesses must establish and update databases relating to transactions (transaction date, price, type of goods, quantity, identity of customer/suppliers, etc.) in order to:
- keep up with all developments in the market in which they operate;
- facilitate timely decision-making in order to cope with change;
- help to identify opportunities.
To do so, businesses must exploit the raw data generated every day:
- selection of relevant indicators;
- collection, sorting, evaluation;
- presentation in the form of scoreboards;
- regular monitoring.
This historical information can also be used as a starting point for drawing up a business plan, including forecast production, sales or estimated margins for future periods.
Failure to monitor competitors and the market
Certain businesses do not monitor the market in which they operate in qualitative terms: competitors, services, products.
Businesses must regularly carry out and update market and economic environment research as well as business analysis (e.g. 'SWOT') so as to define their position on the market and to cope with the timely resolution of problems.
Overdependence on a limited number of partners
Certain businesses generate the majority of their turnover with one or 2 major customers, or place their orders for equipment or raw materials with a limited number of suppliers. Such dependence presents a risk because any external fluctuation can rapidly affect the business.
Businesses must monitor their commercial relationships closely in order to identify such cases and take corrective action if necessary. In any case, it is essential to weigh up the respective merits of increased diversification and the development of a privileged relationship with a business partner.
Failure to listen to customers
Certain businesses do not proactively follow up on recommendations, claims or complaints made by customers or third parties.
By carefully monitoring customer relations, businesses may avoid losing customer loyalty or breaking off relations with a customer.
Organisational structure and human resources
Lack of procedures describing key processes
In certain businesses, the processes and work flows are only known to the employees but are not formalised on paper or electronic media.
Businesses must formalise their procedures in order to avoid:
- difficult transitions in the event of losing key personnel, who take with them their know-how when they leave;
- inefficient introduction of new staff members who must learn how to do the job by observing their colleagues;
- loss of efficiency due to the lack of standardisation or transfer of good practices within the business.
Lack of clearly-defined responsibilities
Similarly, clearly identifying, defining and distributing tasks, roles and responsibilities between employees is vital to minimising losses of efficiency caused by misunderstandings or overlapping responsibilities.
Inappropriate recruiting policy
Certain businesses recruit on an 'ad hoc' or 'as required' basis without tying recruitment to their long-term objectives.
Businesses should control their recruitment policy in order to avoid:
- mismatches between the needs of the business and the skills of the persons available;
- a wage structure that is not suited to the competitive environment in which they operate.
Inappropriate personnel management
Personnel management should not be restricted to HR administration (pay, sickness, leave, etc.).
To fully play its role, HR management must, insofar as possible, try to develop the skills of employees and manage their careers. This may be achieved through career plans, in-house training plans, an evaluation system and a motivation policy. These measures generally help to improve the performance of employees and even increase their loyalty to the business.
Furthermore, businesses must implement regular monitoring of staff turnover as well as of absenteeism in order to detect any potential problems in advance and thus avoid the departure of key employees.
Delaying decisions
Business managers do not always take swift enough action on organisational, operational or financial matters.
Managers must take decisions in good time in order to prevent a decline in the efficiency of the business's operations.
Financial control and management supervision
Inadequate monitoring of customer and supplier accounts
Some businesses neglect to monitor customer and supplier accounts, especially when business is going well. This makes it all the more difficult to instil payment discipline in a time of crisis. Shortcomings in this area can:
- at best, result in an opportunity cost;
- generate additional costs linked to high interest rates due to financing temporary deficits;
- at worst, lead to bankruptcy.
Close monitoring of the amounts and settlement dates of payables and receivables is key to good cash flow management.
Lack of regular financial and operational monitoring at appropriate intervals
Certain businesses close their accounting year several months after the end of the year and do not carry out any intermediate financial monitoring or carry out monitoring that is not detailed enough to take well-informed decisions.
This problem arises for historical figures (possibility of taking corrective action if problems are detected in good time) as well as for forecast figures (projections, budgets, business plans).
In addition to the impact on business management, this can also generate higher financing costs or, in the worst case scenario, a refusal on the part of banks to provide financing due to a lack of transparent data.
As is the case for commercial monitoring, businesses are strongly advised to select a minimum set of performance indicators that are monitored regularly by means of scoreboards.
Monitoring via scoreboards allows a business to:
- identify any upward drift (e.g. in terms of costs) in good time;
- make comparisons with competitors, provided that comparable information is available (benchmarking).
The monitoring frequency should be appropriate for the area in question:
- for example, monitoring of cost trends can be carried out on a monthly or quarterly basis;
- whereas cash flow requirements should be monitored more frequently (weekly or even daily).
Incomplete or non-existent analysis of the return on investment
Investments in machinery and production tools are often the most significant items in terms of a business's cash outlays.
A detailed analysis of future cash flows generated by a given investment and a comparison between the different alternatives are fundamental aspects of the pre-acquisition phase.
Difficulties in meeting payment deadlines for tax and social security obligations
Some businesses encounter difficulties in meeting payment deadlines for tax and social security debts as a result of poor cash flow management.
It is often possible to negotiate a short-term moratorium with the authorities concerned, but this can only be a temporary solution.
Inappropriate cover in terms of equity capital
By identifying additional equity capital requirements in good time, businesses can develop suitable recapitalisation plans.
Who to contact
'Contact Entreprise' at the Chamber of Skilled Trades and Crafts - Luxembourg
-
Chamber of Skilled Trades and Crafts Contact Entreprise
- Address:
-
2, circuit de la foire internationale
L-1347
Luxembourg-Kirchberg
Luxembourg
B.P. 1604, L-1016
- Email address:
- contact@cdm.lu
- Website:
- http://www.cdm.lu/
House of Entrepreneurship
-
House of Entrepreneurship
- Address:
- 14, rue Erasme L-1468 Luxembourg Luxembourg
- Phone:
- (+352) 42 39 39 330
- Email address:
- info@houseofentrepreneurship.lu
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