Every industry and business has interesting ratios and rates that are relevant to it. For e-commerce, returns are around 8%; the average conversion rate on a Google Adwords advertisement is 2%, and so forth. I’m sure you can think of some in your business.
In my business, we have a ratio, too: one I call the Rotten Ratio.
The Rotten Ratio is when sales equal debt.
Take a second to think about that: sales equal debt. Believe it or not, I have a number of companies in this situation.
But how does something like that happen? Why do I keep getting hired at this rotten sweet spot?
Well, when business is good and sales are going up, companies decide to buy a new factory, or purchase new equipment -or Ferraris – you know, whatever the necessities are. In order to do this, they borrow money, which at the time makes sense when they look at their sales and growth.
However, as they tend to do, especially when companies and their leaders get distracted, sales slow down, yet that debt is still there. In efforts to sustain their perceived growth, companies take ill-advised steps, which sometimes include more borrowing. At the very least, they don’t pay their debt down, and with sales continuing to slow, they don’t get any closer to doing so.
Numerous warning signs should likely have tipped off CEOs, owners and boards off to the impending crisis that’s coming their way, but as I often say, no one calls me and says, “Lee, I’m going to have a crisis three weeks from Thursday.”
By the time sales and debt meet, it’s become clear to many CEOs that they need to bring in a professional, so when I arrive and start looking over financials, I notice time and time again that sales do indeed equal debt: the Rotten Ratio.
Though you should know that things are turning sour before your sales and your debt numbers meet, by the time they do it’s a pretty good indicator that you’re going to need to change the way you’re doing something and take some drastic steps to resolve your company’s problems. When that happens, seek professional help. Oftentimes it takes a professional to make the truly huge and hard decisions that will save a company.
Remember, turnaround isn’t pretty. We often have to amputate a leg to save a company, and when you’ve just moved into a shiny new factory, selling it off seems like the biggest backwards step and the one thing you’re not willing to do. But that’s why, as a CEO, you have to check your ego at the door, admit you’ve made a mistake (or multiple mistakes) and do whatever needs doing to save your company and the jobs of those who depend on it.
When you’re moving towards the Rotten Ratio, get proactive.
Have you ever seen the Rotten Ratio? What other reasons do you think a company might find itself in this position?