5 Tough Steps to Save Your Failing Business
If you own your own business you know that sometimes its possible to experience failure. This article that TS Associates found on Entrepreneur to help you save your business.
5 Tough Steps to Save Your Failing Business
It happens. Businesses get into trouble. You find yourself in a cash crunch. You can’t pay your bills — or worse, you struggle to make payroll. It is a tough spot to be in. However, we have helped many businesses find their way back into the light. To do this, you’ll have to make some difficult decisions and you will need to take decisive action to save your business.
We’ll give you some general thoughts and some examples on how to address your most pressing needs. However, if you are in trouble, it may be a good idea to reach out to an expert for help. Don’t delay. These situations most often do not fix themselves and there is a point of no return.
1. Ensure that you have a positive variable contribution.
That is, make sure that the price you receive for your product or service exceeds what it costs you to deliver an incremental unit (e.g., make one more widget or perform one more hour of service). Do this for every product, if you have multiple products. If you price customers differently, the analysis must be done at the customer level. When you find situations with a negative variable contribution, increase the price, reduce the cost of providing the incremental unit or stop offering that product or service. There may be rare exceptions to this rule, but in general, you have got to ensure that you are making money to cover your overhead on each sale.
We worked with a home health business that found itself losing money, despite having more customer than a year earlier. Upon digging in, we found that there were several cases where higher-level and expensive nursing staff had been assigned to cases that could have been handled by employees with less training and a lower cost. In several instances, the cost of the employee was more than the company was charging per hour. Obviously, this is losing scenario. We were able to put some controls in place to more correctly match the client needs with appropriately priced staff. We also gave the owner a spread. In other words, we told her she had to charge the client a specific dollar amount over the hourly employee rate. When she did this, her problem was solved.
2. Cut costs.
To stay in business, you will likely have to reduce your costs. First, eliminate all discretionary spending. The summer outing or the company holiday party need to go. Next, look to non-people costs. Can you reduce what you pay for travel costs or utilities? The landlord may be willing to reduce rent, at least for a time, if the alternative is empty space because you are out of business.
Unfortunately, cutting costs may well involve the difficult decision to lay off people, reduce their hours or reduce compensation. Austerity measures are never easy, but if the alternative is closing your business, it will be better to keep some people employed than for everyone to lose their jobs when the company shuts the doors.
We worked with the owners of a moving company that found themselves losing money. We helped them to find $10,000 a month in savings — the number they needed to reach profitability. However, these savings included asking the landlord for concessions, trimming staff and closing an unprofitable part of the business. Difficult decisions, but necessary to save the company.
3. Prioritize your payables.
You owe more than your available cash. Therefore, you must prioritize what to pay. We suggest prioritizing in the following order:
First, pay any obligations that will shut your business down if you don’t pay them. For example, if you don’t pay your employees, they will likely leave to find work with employers who can pay them. If this leaves you unable to deliver your product or service, you’ll be out of business. Paying employees is typically a top priority. Also, think about those vendors who supply needed materials.
Next, prioritize items that will result in large penalties. For example, not paying taxes in a timely manner can sometimes result in massive fines. Avoid these if possible.
Third, any payment that is late should be next in line while, finally, prioritize payments that are not yet late last.
4. Plan your cash flow carefully.
Once you have prioritized your payables, assess the cash you have and the receivables you expect to collect. Then build a detailed cash flow plan that lays out who you will pay, when you will pay them and how much you will pay them.
We worked with an HVAC contractor on a weekly basis as they managed their way out of a cash crunch. This meant working with their controller to build a cash-flow plan. We looked at what cash was expected each week for the next several months. After sequestering payroll, we calculated what cash was left. The management team met with us each Wednesday to determine whom we could pay and how much. It was tight for several months, but the business stayed afloat and is solidly in the black today.
5. Communicate with creditors.
It’s tempting, when you owe money you can’t pay, to ignore the situation and hide. This is almost always a mistake. Call your creditors, explain your situation and your plans to pay your debt. Most people are willing to work with you if they believe that you will eventually pay what you owe.
If you have bank debt and will break a covenant, either because you will miss a payment or because some other requirement will not be met (e.g., liquidity requirements), proactively communicate with your banker regarding your situation. Remember, your banker is primarily interested in being repaid. The bank will likely only call your loan if it assesses that there is little hope of being repaid otherwise. If you proactively go to your banker with a sound plan to improve your financial situation and repay the loan, he/she is highly likely to work with you.
With the HVAC Company mentioned above, communication was part of the plan. The controller and the owners got on the phone with vendors as often as daily to make sure their accounts stayed open during this tough time. Only a couple of creditors cut them off. Most were willing to keep product flowing. It was clear, honest communication that helped this to happen.
The five tips will help you effectively triage your priorities when your business is struggling. However, don’t wait until it is too late to take action. Move quickly to get your business back on the right track.
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