Red Flags in Business

I recently got an opportunity to speak at a newly formed community consisting of Professionals from diverse fields. The topic given to me was:

” Red Flags in Business”

My first question to the organizer was –

” How much time do I get to speak “….
” 5 to 7 minutes” came the reply.”

Well, this is one topic which can be discussed and deliberated upon for hours together… as I started jotting down my points basis my 20 years of corporate world experience followed by 6 years of entrepreneurship, I realised the list is long…so decided to pen down my thoughts and blog it out!

So here we go …

Any organization irrespective of size, vintage and domain should ideally have some pillars so as to make the foundation strong and last long. In my view, 5 pillars which make sense are  – Product or service that it sells, Distribution, Processes, Manpower & culture and Financial Capital.

Red Flags normally seem to be a function of any irregularities in any of these foundational pillars.

So here is my take with respect to Red Flags in Business

Attrition: There are broadly 4 reasons why one leaves a company.

• Culture of the organization / Toxic boss
• Better brand
• Better profile
• Better salary

Brand, Profile and Salary can still be managed but culture is something which stands out as one of the most important reasons for attrition. A big big red flag!

• Communication: Any kind of communication gap between the top management and the team below is not a healthy sign at any cost. Have seen numerous cases wherein even the middle management  has no clue as to why are they doing what they’re doing. Have also seen positive cases eg ICICI Bank wherein the senior management makes it a point to conduct quarterly town halls for having a healthy interactive session with the teams below. Lack of communication definitely adds to lot of chaos and insecurities and would get categorised as a red flag.
• RPRJ: Right Person Right Job – often there are cases wherein bosses do not want to let go of their team members for one or the other reason …can be emotional, can be a strong reference from someone or can be any other reason. Eg a Digital Marketing or a branding person managing a sales profile ( obviously not out of choice)…a hard core sales person asked to manage an operations profile etc. This may suit the company from a short term perspective but is definitely bound to create a disconnect in the long run. A sure shot red flag!
• Pareto’s Rule of 80/20: Not a healthy sign if any business is skewed. Eg if 80% of your business comes from 20% of the team or a product or a brand or a specific geography…in my view this is a red flag. One wrong step and this 20% contributor can create ripples. Eg in the banking industry, retail CASA is considered to be given priority over big ticket clients since this is more stable.
• Operations: A founder or promoter spending too much time in the day to day operations of the company is not a healthy sign. Ideally a founder or CEO should spend time ON the system and not IN the system. Makes lot of sense to allocate at least 1 to 2 hours every day towards planning and strategizing. A founder fully involved in the day to day operations is definitely a red flag.  Being aware of what is going on is different from getting involved fully at the cost of allocating time for more important aspects like planning.
• Ventilator Approach: If I were in the ICU and had a ventilator on my nose, my life would be dependent on the external oxygen being supplied. The moment it is taken off, things are over. Similarly, any organization especially a new age startup which is dependent on external VC funding for its day to day functioning is a cause of concern. VC funding should ideally be for growth and expansion at some stage. If a business does not have a self sustainable model which creates free cash flow, there is a red flag. Sooner or later, the ship is bound to sink.
  
  Correlation between inventory, sales, discounts, margins and profitability: in a typical distribution centric business, companies are expected to lift inventory from suppliers so as to enjoy special discounts. If the sales go down the inventory goes up. There is a temptation to offer discounts so as to increase the sales.
  
  Discounts lead to low gross margins and thus the profitability goes for a toss. In nutshell, high inventory, low sales, high discounts, low gross margins are all red flags from a business stand point.
• Customer feedback: If not taken seriously is definitely a red flag. The whole idea around running a business is to create happy customers basis which a company earns revenue and makes profit provided rest of the enablers are in place. If the customer itself is not happy and if there is no action taken on the feedback, there is bound to be dissonance leading to not so happy situations.
• Founders: If the founders do not share the same vision, there is bound to be an issue sooner or later. And this comes out very clearly during meetings, events and any such common forum. This is one aspect which , if not addressed early on, can turn out to be disastrous for the organization in the long run.

There are certain warning signs which keep appearing every now and then. It requires experience, intelligence, awareness, wisdom and knowledge to understand patterns and these so called red flags.

Running a business is surely a roller coaster ride which is full of fun, anxiety, fear, setbacks, bounce backs and a whole lot of interesting stuff…and yes..its worth every ounce of energy spent on it !