Business In Trouble

The early warning signs & a 7-step recovery program

All too often it isn’t until a business owner is faced with dire consequences that he/she is willing to admit ‘the business is in serious trouble.’ Don’t be confused — I am not talking about snags, hitches, setbacks, hindrances, quandaries, predicaments, obstacles or dilemmas. These difficulties are the daily stock-in-trade of all business owners. However, left unattended, they are the precursors of crisis. To state the obvious, the problem with ignoring, or delaying, the process of dealing with business difficulties is—the longer the delay, the longer it will take to resolve it and more of the business owner’s time will be consumed in the process.

What are some of the typical early warning signs of pending disaster?

Sales…

  • There is little or no revenue growth (either the number of sales is falling and / or the average sale size is less).
  • The sales “pipeline” of potential orders is slowing.
  • The sales staff is reporting fewer order-producing sales calls than they have historically averaged.
  • Key customers have stopped buying or their orders are smaller and less frequent.
  • Customer special requests, comments and complaints are increasing.
  • There is competitive pricing pressure (created by either new competitors or existing competitors seeking to increase market share, or by new technology).
  • Profit margins on sales are declining (due to excessive customer incentives, etc.).

Financially…

  • Available cash balances are shrinking.
  • Checking and savings balances are trending lower than normal averages.
  • Credit line balances are trending higher than normal averages.
  • Customers are taking longer to pay.
  • The business must borrow more money to make credit payments or meet business obligations.
  • Supplier payments are late (either continually delayed or put off all together).
  • Tax payments are delayed or unpaid.
  • Key customers (or many customers) are having financial problems.
  • Profit is decreasing (a steady stream is required to service debt, and invest in new technology, equipment and business development).
  • Banks, other loan providers and credit-term vendors request additional information on financial statements and loan applications.

Operations…

  • Inventory (in general) is increasing.
  • High volume inventory items remain unsold for longer-than-expected periods.
  • Cost of producing goods or services is rising.
  • It is taking longer to produce goods or services.
  • Equipment failures threaten productivity (raising direct costs & lowering profit).
  • Employee turnover spikes.
  • Growth and development plans requiring additional funding are retracted, delayed or cancelled.

Disaster can be averted. All that is required is recognizing the early warning signs, analyzing the problem(s) and potential resolutions, developing a corrective action plan, and swiftly implementing it.

If a business owner has any doubts about the ability to effectively execute any of these steps (analyzing the issues, identifying the proper corrective action, and implementing the solutions), seeking outside help from a qualified, experienced professional is mandatory.

As the saying goes, “given an infinite amount of time and an infinite amount of resources, any problem can be solved.” Prior to deciding to try his/her hand as a ‘self-fixer,’ a business owner should consider the future lost revenues and profits, the hard costs, and the time that will have to be expended in ‘experimenting’ on a trial and error basis with alternative solutions and with no certainty of success.

The small business owner is best advised to take a page from the play-book of the Fortune 500 companies. In spite of the fact that they have thousands of employees on staff with a broad range of expertise and many thousands of years of experience, they still collectively spend billions of dollars each year on ‘outside’ expertise to solve core business problems. Why? They have run the calculations and determined the return on investment from outside assistance outweighs the associated cost, both in time and money.

Now you have to ask yourself, is the average small business owner more savvy and capable than the leaders of the Fortune 500? Although small business owners may be savvy regarding the technical aspects of their craft, either as a result of ego, perceived lack of available funds, or simply the inherent nature of the entrepreneurial spirit, they tend to be self- healers who attempt to resolve all business problems themselves. Such ill advised ‘self- surgery’ often results in compounding the problem to the point where even more of the owner’s time and money will have to be committed to resolve the issues in question. Eventually, if they are fortunate, common sense prevails and the business owner realizes there is only one logical conclusion: seeking outside professional assistance is the only reasonable, cost effective option available.

Companies of all sizes experience similar problems. Although the resolutions to them are strikingly similar, the ‘fix’ applied must be custom tailored to the individual company to achieve optimum results.

The 7-step recovery program

Step 1 – Have an effective “proactive” monitoring system in place. An effective “proactive” monitoring system must be developed that allows a small business owner to keep a finger on the pulse of the business. It is best to condense the information to a one-page format containing key financial and operational information that is updated and reviewed daily to identify positive, and negative, trends as they are developing. Each line item should reflect the actual current daily, weekly, and monthly numbers, the targeted goals, and the comparable numbers from the same periods of the prior year so that they can be easily contrasted and analyzed. The line items incorporated will be unique to the business’ specific industry and operations. They would typically include key financial information (e.g. sales, sales backlog, inventory, accounts receivable and accounts payable—their respective aging, available credit line balance, cash conversion cycle, etc.) and key operational information that measures activity in each department or segment of the business (e.g. number of sales leads generated, sales closing percentages, production scheduling requirements, number of units produced, orders in process, orders delivered, etc). It is only through activity that sales are produced, and it is only by effectively managing activity that profitable sales are possible. All deviations from the desired numbers should be evaluated and a course of corrective action should be developed and implemented.

Step 2 – Don’t blame the business problems on events beyond your control (e.g. the economy, industry trends, 9/11 etc.). Don’t even consider using events beyond your control as an excuse for your failure to develop a course of corrective action and implement it. This is a luxury only your competitors should be allowed to indulge in. Seize the moment. Take advantage of their complacency and failure to act. You are being offered the opportunity to gain a competitive advantage — don’t pass it up!

Step 3 – Don’t discount current business trends assuming they are only part of a ‘more protracted-than usual’ seasonal trend. Recognize the trends you see in your proactive monitoring system and respond to them. This is your early warning system. Do not discount the importance of what it is telling you. If you feel an indicator you incorporated in your system is inaccurate or unreliable, replace it with one that you can depend upon to provide you with accurate, timely information.

Step 4 – Realize more money is not the answer to your problem(s). Don’t fall into the trap of believing that money will solve your problems. Money is not a solution, it is merely a tool. Used effectively, money can correct problems and facilitate risk-controlled growth. Used as an anesthetic, it will provide shortterm piece of mind followed by a return of the painful consequences of not effectively dealing with, or ignoring, a problem. One measure of success in business is the level of financial return generated by the business. An effectively run business enterprise generates money. Failing businesses dissipate money and require a constant infusion of additional outside funding.

Step 5 - Recognize and react to early warning signs (and engage professional help to assist in building a recovery plan). Albert Einstein was quoted as having said, “No problem can be solved from the same level of consciousness that created it.” A small business owner must determine whether or not he/she (or the employees) possesses the skills, talent, and expertise to resolve a problem or experienced outside expertise is required. In some cases the skills, talent, and expertise does exist inhouse. However, sometimes an analysis of the cost associated with the time required and/or the lost productivity incurred clearly dictate utilizing outside expertise as the most cost effective approach.

Step 6 – Stay calm and stay focused. When we lose sight of our goals, all we can see are the obstacles. The wise and successful person is the one who keeps their senses about him/her when all others around are losing theirs. The steady and focused execution of corrective action, tempered with necessary fine-tuning adjustments along the way, will always win the day. When problems and chaos abound, staying calm and focused can test the metal of any entrepreneur. Although it may seem unbelievably difficult, it is the right thing to do.

Step 7 - never stop marketing. The goal must always be growth and expansion. Sales and marketing are momentum driving activities. The competitive nature of business has taught us that if we are not constantly struggling to move forward, we will fall behind. In fact, when things seem to be going well, small business owners should avoid the temptation to rest on their laurels. The right course of action is to “strike while the iron is hot,” re-doubling sales and marketing efforts to reap the maximum available benefits and expand market share.

A discussion of this topic would not be complete without reference to the all important ingredient, timing. Timing is the key. The worst thing a business owner can do is ignore the warning signs. Business troubles are like cancer. If you diagnose the problem early-on (before it metastasizes) and immediately institute a treatment protocol, the prognosis for a complete and speedy recovery is very high. The longer the underlying cause is allowed to persist, the more prolific the symptoms and the less likely a speedy and/or complete recovery is possible. Just like cancer, if left untreated, a quick death is inevitable.