Business decline happens, but is often avoidable. Decline can occur because of both Internal Factors and External Factors (and a detailed assessment of each should constantly be on management's radar). Most experts agree, however, that somewhere between 65% and 100% of failures are attributable to internal problems.
Business decline happens, but is often avoidable.
Business failures are often multiple years in the making, and the ability to recognize early warning signs of decline is critical to preventing decline from turning into distress.
1. Leading indicators can be identified by a careful trend analysis of several Key Performance Indicators (KPIs) of the company's health.
2. Lagging indicators, such as financial statements, are excellent sources to help managers understand what problems have already begun to occur in a business. While financial statements tell the story of the past instead of the future, they still hold value as they can alert management to small problems before they become big problems. A review of financial statements on an annual or even a quarterly basis is too infrequent. Weekly reviews toward monthly milestones are appropriate for most small- and medium-sized businesses, while those in distress may need to pursue daily goals.