Diagnosing a Problem

Ever wonder how I quickly diagnose issues?

This week, I'm going to share a handful of tables used in my Elite Program runs. Many of you already participate in the Elite Program. Most of you should have something comparable that you look at internally. It's been my experience that those who don't have something comparable "make up" a lot of theories about why business is good/bad.

Here is a Rolling Twelve Month analysis. Look at the table, and tell me what this business did to cook the books.

There are many "rolling analysis skeptics". These are the kind of folks who, in my hobby (headphone), like treble-enhanced planar magnetic drivers. They want all the details. I'm more of a tube amp kind of person, I like a warmer signature, smoothed over. I want a longitudinal view of a business. I want to see when the merchant made a mistake. I want to see when the finance professional injected herself into the business. I want to see when a marketer made a mistake. I want to see all of that in the context of time.

This is one of those situations where the CEO might tell me that everything is fine, the business is stable at around $40,000,000 per year, top-line sales.

No. The business is cooking the books.

Why do I say that?

The two columns on the far right side of the table.

• Demand from Items Selling Above Their Average Price Point.
• Demand from Items Selling Below Their Average Price Point.

Let's say you have an item that sells for $49.99. The marketer decides to run a promotion, 40% off. Now the item sells for $29.99. When the item sells for $49.99, it is selling at/above their historical average price point. When the item sells for $29.99, it sells below their historical average price point.

Now go back to the two columns on the far right side of the table.

Items selling at/above their historical price point:

• $27.9 million past year.
• $30.5 million a year ago.
• $31.7 million two years ago.
• $31.0 million three years ago.

Here are items selling below their historical price point.

• $12.7 million past year.
• $10.0 million a year ago.
•   $9.2 million two years ago.
• $10.9 million three years ago.

The past year tells us an interesting story. Full-priced selling declined by $2.6 million while off-priced selling increased by $2.7 million.

In other words, Management "cooked the books" ... they likely saw that they weren't going to meet budget, so they lowered prices via promotions to get the top-line "in-line".

Either this company has an inventory problem (rectified by clearing out products at lower prices), it is missing budget (which often causes an inventory problem) due to lower customer response, it has a forecast issue (the forecast was mistakenly assigned to be too high for what customers can deliver), or all off the above.

Are there other ways to diagnose this issue? Of course. Are you using other methods? Too often, the answer is "no". There's just speculation ... which is fun ... but isn't meaningful.

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