Causes of declining financial performance

Declining financial performance is every CEO's nightmare.  For smaller organisations, just one event can send a company into decline.  For larger companies like HIH, Ansett Australia, OneTel and Enron, it may take one or two large events or several small events over a period of time.  So what are the factors you need to watch out for that can lead to declining financial performance?  

 Poor management

·          An ineffective board of directors characterized by poor decisions and lack of strategic direction.

·          An autocratic and dominant CEO who has total control & does not tolerate dissent.

·          Combining Chairman & CEO which effectively removes the 'watchdog' element over management and corporate governance.

·          Management lacks business knowledge and management depth in key skills required for the changing organisational needs.

·          Neglecting good core business to pursue more risky & opportunistic growth strategies.

·          Not managing staff effectively, leading to poor culture, productivity and performance.

Inadequate financial control

·          Poor cashflow management and lack of monitoring.

·          Poorly designed financial management systems producing inadequate, incorrect, untimely or irrelevant information.

·          Inability to harness data and use financial/operational information for strategic decisions.

·          Poor organisational structure hindering effective control e.g. - over-centralization, micro-management.

·          Inappropriate/erroneous cost allocation/valuation methods resulting in incorrect reporting.

Inappropriate financial policy

·          High debt to equity ratio leading to additional cost of capital.

·          Overly conservative financial policy e.g. - conservative investment strategy, inadequate maintenance. 

·          Unstructured balance sheet by not matching assets and liabilities.

Increased level of competition

·          Increasing product competition leading to an erosion of customer base and market share.

·          Severe price competition eroding margins due to maturing products, lower entry barriers, competition.

High cost structure

·          Relative cost disadvantage due to lack of economies of scale and/or high learning curve.

·          Cost disadvantage if diversification strategy prevents economies of scale and resource sharing.

·          Operating inefficiencies such as low productivity levels and lower asset utilisation rates.

·          Unfavorable government policy affecting economy/industry resulting in cost/capital disadvantages.

Adverse changes in market demand

·          A decline in demand due to change in technology, social trends and tastes.

·          Cyclical changes in market adversely affects demand e.g. interest rates, unemployment, inflation.

·          A shift in the way a product/service is distributed, packaged or purchased.

Lack of marketing effort leading to a decline in business

·          Poorly motivated sales force. Non aggressive sales manager.  Poor sales targets.  Poor sales plan.

·          Failing to focus on key customers, segments or products.

·          Lack innovation/investment in new products. No new product release. No change to current products.

Big projects/products that fail to deliver expected benefits

·          Underestimating capital requirements due to poor planning, poor implementation or external factors.

·          Start up difficulties such as early process inefficiencies, wastage, delay in securing resources.

·          Higher than anticipated market entry costs i.e. product development, R&D and promotion.

Acquisitions that go wrong

·          Poor acquisitions that consume management time, resources, cash and have no hope of turnaround.

·          Paying too much for an acquisition, placing strain on capital without adequate future returns.

·          Poor post acquisition management resulting in an inability to extract.

Sources - InConsult research and Corporate Recovery, A Guide to Turnaround Management by Stuart Slater