October 24, 2011

Death Spiral: Expenses

Pay close attention to the signals you receive from Management.

You're blessed when your Management team wants you to grow the business, and gives you marketing dollars to do just that.

It's a bit more stressful when somebody asks you to start minimizing expenses.

Businesses in a Death Spiral are constantly focusing on expense reduction.

If you can get your hands on a profit and loss statement, take a look at several expense lines, especially over the past three to four years.
  • Marketing Dollars as a percentage of Net Sales.  If sales are decreasing while expenses are increasing, then Management is trying to spend their way out of a Death Spiral.
  • Pick/Pack/Ship and Contact Center Expense as a percentage of Net Sales.  If sales are decreasing, and this expense line is the same percentage of Net Sales, then Management is actively trying to fly the plane out of a Death Spiral.  If sales are in decline, and this expense line is increasing as a percentage of Net Sales, you might want to question the Management Team about what they are thinking!
  • Promotional Dollars as a percentage of Net Sales.  If this number is rocketing skyward, then your Management Team is trying to use promotions to fly the plane out of a Death Spiral.
  • Gross Margin Percentage:  When this line is decreasing (was 62%, then 59%, then 54%, then 52% by year), it tells you that the business is spiraling out of control, that Management is actively trying to lower prices to move merchandise.
  • Liquidations/Clearance:  You only sell a lot on clearance when your inventory team buys too much, or the customer buys too little merchandise.  Pay close attention to the this.
Carefully analyze your profit and loss statement, and look for these tell-tale signs of a Death Spiral.

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