Overview
This guide points out five clear warning signs that your business model is broken. For each sign you'll get simple examples, a one‑minute checklist, and a short decision rule you can use right away.
Warning Sign 1: Sales don’t cover basic costs
What it looks like: Revenue keeps coming in, but payroll, rent, and materials aren’t reliably paid without dipping into savings or credit.
Example: A café brings in steady customers but monthly revenue is 85% of fixed costs. Owner covers the shortfall with a personal credit card.
One‑minute checklist:
- Calculate monthly fixed costs (rent, core payroll, insurance).
- Calculate gross profit margin on typical sale (price minus direct cost).
- Estimate how many sales are needed to cover fixed costs.
Decision rule: If current monthly sales < 110% of fixed costs, treat model as broken until fixed costs fall or sales grow.
Warning Sign 2: Customers don’t buy repeatedly or refer
What it looks like: Lots of one‑time buyers, low repeat rate, poor word‑of‑mouth, or high churn for subscriptions.
Example: A local landscaping company acquires 20 new clients a year but loses 18 because customers don’t sign seasonal maintenance plans.
One‑minute checklist:
- Measure repeat purchase rate or churn over 6–12 months.
- Ask 20 recent customers one simple question: Would you buy again or refer us?
- Track Net Promoter Score (NPS) with one numeric question.
Decision rule: If repeat rate < 30% (retail) or churn > 10% monthly (subscriptions), redesign offering or improve retention fast.
Warning Sign 3: Profit margin is squeezed or negative
What it looks like: Gross margin is shrinking because costs rise or you’re forced to discount to win sales.
Example: An online store’s product costs rose 15% but price stayed the same. To keep sales they ran frequent promotions, cutting margins further.
One‑minute checklist:
- Calculate gross margin percentage (revenue − cost of goods sold / revenue).
- List top 5 input costs and track 3‑month trend.
- Identify lowest‑margin 20% of products/services.
Decision rule: If gross margin < 30% for product businesses or < 50% for service businesses, change pricing, reduce input costs, or stop low‑margin SKUs.
Warning Sign 4: You’re competing on price only
What it looks like: Customers choose you mainly because you’re cheapest. When a competitor undercuts price, you lose business.
Example: A boutique printer undercuts competitors for big jobs by 10%. When a new low‑cost player arrives, orders drop 40%.
One‑minute checklist:
- Ask 10 customers why they chose you. Note price vs other reasons.
- List three non‑price values you provide (speed, design help, warranty).
- Check competitor pricing and marketing claims.
Decision rule: If >50% of customer reasons are price, develop one differentiated value (faster lead time, bundled service, stronger guarantees) within 90 days.
Warning Sign 5: Cash flow is unpredictable or chronically tight
What it looks like: You have good revenue months and terrible months, rely on late payments, or delay vendor bills routinely.
Example: A contractor gets big projects that pay on 60‑90 day terms, but needs to pay subcontractors weekly. Owner borrows to bridge gaps.
One‑minute checklist:
- Prepare a 3‑month cash flow forecast (expected inflows and outflows by week).
- List top 5 receivables older than 30 days.
- Check payment terms with suppliers and customers.
Decision rule: If your cash buffer covers < 30 days of fixed costs, tighten terms, collect receivables, or secure a short bridge loan.
Quick fixes to try first
Simple actions you can take right away:
- Raise prices by 5–10% on low‑frequency items and test customer reaction.
- Introduce a small subscription, maintenance, or retainer option for steady income.
- Stop selling any product or service that loses money after allocation of direct costs.
- Require a deposit on large jobs and shorten invoice terms.
When to redesign the model vs. tweak it
Decision map:
- Tweak if one or two warning signs appear and you can fix with pricing, collections, or a product cut.
- Redesign if three or more signs are present, or if problems persist after 90 days of focused fixes.
Practical next steps (30‑60‑90 day plan)
30 days: Run the checklists above, stop loss‑making items, and fix invoicing terms.
60 days: Implement one differentiation (bundle, warranty, faster delivery) and test a 5–10% price increase on a segment.
90 days: Review margins and repeat rates. If metrics haven’t improved by 20%, create a new business model hypothesis (target customer, pricing, delivery) and run a small pilot.
Final checklist to carry in your wallet
- Monthly fixed costs calculated? Yes/No
- Gross margin measured? Yes/No
- Repeat rate or churn tracked? Yes/No
- Cash buffer >= 30 days? Yes/No
- Top 3 non‑price differentiators listed? Yes/No
Use this checklist monthly. Fix what fails first: cash and margin. Those two keep the business alive while you test bigger changes.