Back from the brink: What to do if your business falters

Back from the brink: What to do if your business falters
When there’s a problem, most of us tend to hope it will either straighten itself out or go away. And while many problems do resolve themselves, a business in trouble needs action.

Turning around a business requires a strong commitment. It takes energy and determination, and it’s not going to happen overnight. You need to quickly develop both short- and long-term strategies in some detail.

Buying time
Your first goal is to buy time for the business. This requires several actions, and they all need to be done quickly, before the situation gets much worse.

Talk to someone at your bank. Be candid about the fact that the business is having problems. Be equally candid about what you're looking for from the bank.

In most cases, the pressing need is money, such as a loan, that would enable the business to keep current with employees and suppliers and pay something to the other creditors. The bank may see this as idealistic, however, so be prepared to suggest alternatives.

If the business already owes money to the bank, ask about restructuring the debt repayments. Can you arrange for lower payments, even for a short period of time? Can you convert some of the debt from short term to long term?

Optimistic hopes aren’t going to convince the banker. You should be prepared to present:

• a detailed cash-flow forecast;
• a short-term strategy for getting the business back on its feet; and
• a comprehensive, long-term strategy for rebuilding the business’ financial stability and avoiding future problems.

The banker may not be interested in that much detail, but the fact you’ve given the matter such careful consideration should work in your favor.

You also may want to seek out a co-borrower. Since most people aren’t going to leap at the chance to co-sign for a business in trouble, you’ll need to make a strong case for the business’ ability to recover. The banker or co-signer may want collateral. This can take various forms, from liens on various assets to partial ownership of the business. But no matter how urgent the situation seems, think very carefully about "giving away" a stake in the business.

Satisfying your creditors
Meet with each creditor to discuss the debt and your plans for repaying it. As with the bank, you need to be forthright about the business’ problems and the solutions you are proposing.

Owners sometimes balk at sharing financial information with creditors. You don’t need to tell them every detail of your business’ financial life, but creditors do have a stake in your business, and they’re concerned about protecting that stake. If a request for information seems inappropriate or irrelevant, ask as reasonably as you can just why that information is sought.

Often, a good approach is the puzzled one: "If I understood just what you needed that for I could be sure you get what you need. There may be other information that would help as well."

The creditor may be willing to accept a lower level of payments if you already have a history of paying on time. A lump-sum, partial payment up front with a restructured payment plan may be a possibility.

If you need to continue buying from a creditor, as is often the case when the creditor is a supplier, ask about making regular, reduced payments on the arrears or existing debt, and paying cash for future purchases until problems are cleared up.

Staying on good terms with suppliers is essential for survival. Suppliers know that. They’ve seen problems before, and they may have gotten burned extending credit in a risky situation. You need to convince them that your situation isn’t that risky. Again, don’t bluff. Facts and figures with a good plan will speak for itself.

Bankers and creditors will want to find out:

• How you plan to get the business out of the current crisis.
• When the business will become current on debt payments.
• What steps the business is taking to prevent problems from recurring.

Plans need to make sense and be grounded in reality. The more prepared you are with specific information about these points, the more receptive creditors likely will be to a plan.

Remember that your attitude is a factor. Keep the meeting on a business level; don't personalize any requests. The "do me a favor" approach is never businesslike and rarely effective. Discuss the fact that cash is a problem and why that’s so. Then focus as much as possible on plans for pulling out of the crisis.

Short-term strategy
Consider what you might do to get cash into the business quickly. None of the following steps by themselves will solve the problem, but small amounts of cash do add up.

Try everything that seems feasible.

• Focus on collecting accounts receivable. Do you have money tied up in overdue accounts?
  
  
• Reduce top management salaries. Salary levels for owners and top managers vary widely. In some businesses, these salaries are so low that they won't allow for any reduction, while in others the owners and top managers take a substantial amount of money and assets out of the business.

Do not, however, reduce salaries for employees. Employee salaries often are the largest item in the budget, which generates a reaction of "let’s cut that expense." But employees, particularly those on the lower levels who typically are the hardest hit in such a move, are the income producers, the ones who actually generate money for the business. You want to protect that area as much as possible.

In addition, asking people who don’t have a significant stake in the business to do the same level of work for less money doesn’t make much sense unless there’s substantial incentive to do so. What incentives could be offered? The continuation of their jobs may not be the incentive you think it is; the response of most lower-level employees will be to find other work.

What you may be considering is a form of downsizing, and that opens up a whole set of considerations. To downsize effectively you reduce jobs, not people and not salaries. You lower the level of the business by carefully scaling down on every level, so that the business can continue to function.

You may consider letting people cut back their hours, but again, you are likely cutting into the income producing "ranks" of your business.

• Sell an asset. Company cars are prime candidates for this step.
  
  
• Increase prices. A modest increase may be feasible. Be careful, however, of driving away your much-needed customer base with more of an increase.

Intensify marketing efforts
The classic solution of selling off inventory isn’t any help to a service business. However, there is a useful corollary: Focus intently on marketing efforts.

If you offer different levels of cleaning services, consider offering current customers the opportunity to upgrade, perhaps for a discount for six months. (Take care that you still realize a profit, though!) Or, offer a discount or bonus for new customer referrals.

There’s time lag to deal with, of course, and the consideration of getting enough personnel to fill the new contracts, which will require some up-front money. Lenders, creditors and bankers like new contracts in hand, though, and your (successful) efforts can be a strong factor in their decision to help the business.

Long-term strategy
A long term plan needs to address the causes of the problem, improve the business’ liquidity and focus on strengthening the business’ position.

First, identify the causes of the problem. This is when you determine how the problem arose – but not the time to indulge in blame. Balance is difficult; you don't want to rush this step, but you don't want to bog down in past history either. Common sense should tell you when you have enough information.

Serious money problems can look deceptively simple, but they often stem from a combination of factors. Take the time to identify the precise role each factor may have played in the situation.

Some causes may be external:

• customer consolidations
• increased competition
• a trend toward pulling services back in-house
• new government regulations
• a local worker shortage
• customer financial problems that interfere with their ability to pay you

Internal causes could include:

• ineffective financial controls
• over-expansion or undercapitalized expansion
• pricing that doesn’t cover costs and produce a profit
• ineffective cash forecasting
• poor management practices

Then, improve the business’ liquidity. This involves setting goals for the business and identifying the necessary steps to achieve them. Also, quantify those goals as much as possible. Use ratios when appropriate. For example you may decide to

• Increase the current ratio (current assets divided by total current liabilities) from .5 to .7 by the beginning of the next fiscal year.
  
  
• Reduce the debt-equity ratio (long-term liabilities divided by total stockholders’ equity) from 4:1 to 3.5:1 by the same time. Within three years this will be reduced to 2:1.
  
  
• Establish and maintain cash reserves equal to three months expenses.

Finally, try to strengthen your position in the industry or market. Scrutinize your marketing efforts. This needs to be translated into more specific actions, such as identifying and investigating two possible areas of new services; making four additional calls a week; increasing participation in at least one professional association and one business association, or in a community or service group.

Be wary of undertaking anything that involves investing capital. When you’re considering selling to new markets, also consider if this will involve a major increase in selling expenses. Can you redirect some of your existing marketing budget? If you’re considering offering new services, be sure to target those that would be inexpensive to implement, not requiring a major outlay on new floor machines, for instance.
Sometimes the best solution is to reduce the size of the business, especially if the problem is due, in part at least, to expansion that was too hasty or undercapitalized. A smaller business may be more profitable – and not just in monetary terms.

When the business gets into trouble and your choice is between fight, flight or hide, a well considered fight almost always is the best choice. Turning around a business is never easy. But the investment of time, energy and effort can have a significant payoff for you, your employees and your business.

Mary McVicker is an Illinois-based business writer, and author of Small Business Matters. Her business background includes work with a large accounting firm, family-owned businesses and small businesses of various sizes.