Just about every successful business has run into financial challenges that threatened their very existence. If you are just starting out 8 out of 10 businesses or 80% fail in their first two years. Although staggering there are those that survive longer and even get very big. The biggest companies in the world today have all went through a tough spot and often more than once. However, what if your business is a 20-year business and has always made a decent profit and only recently has experienced loss of revenue, or higher unexpected costs, or a litany of business issues that can take a perennial successful business to the financial brink.
If you are the CEO of a middle-market firm with revenue between $1 and $10 million, and have been in business a while and only recently have experienced challenges then this article is for you. With a number of years behind your belt, you have a significant history that got you to this stage. Folding is not an option because you have tens of employees with family and lives at stake. We outline approaches that could stave off failure, but we caution … plans must be aggressive and still might not work. Diligence, focus and all-hands-on-deck mentality must be the mantra in order to save an established business headed for bankruptcy or worse liquidation.
Symptoms of a Failing Business
When a business is failing, there are many reasons for its situation, but one key point that is universal “the current economics are wrong for what the firm is trying to do”. Meaning expenses (outgoing cash) are consistently higher than income or revenue. It’s that simple. You can try to understand why it is in this situation which could be many business reasons but this is the main symptom of a failing business … negative consistent cash flow.
The reasons such as decreasing revenue due to a bad product or bad press or many other reasons are causing revenue to be lower than expenses. Likewise, expenses are higher than revenue due to a poor manufacturing process, returns, unexpected litigation, overtime for employees, too many headcounts and a host of other symptoms. It is important that management understand the “why” or the business reasons for lower revenue and higher expenses. But if for whatever reason you don’t know the why, and believe it or not is uncommon and all you know is revenue is low and expenses are high then what do you do?
Here are some very quick steps to take to attack and that is the best word “attack” the symptoms of a failing business. Additionally, you must do this fairly quickly because depending on where your firm is in the period of failing business “time” is critical.
Tactics to Execute
1) Assess – do you really know what’s wrong? And if you don’t know, do you at least know it’s a revenue-related issue such as a marketing, sales pipeline, market position, pricing, or a litany of multiple other issues? Or is it on the cost side with things are just too expensive, product issues, customer service related, operational, even tax matters? It could be revenue issues “and” cost issues, which is quite often the case.
2) Identify 2-3 issues for both the revenue and similarly on the cost side. Once that’s done, we recommend doing the following. Initially, focus on the cost and expense side (what you are spending). The one thing between revenue and cost that you can change immediately is what you are spending. Would you believe we counsel entrepreneurs thinking they can “grow their way via revenue growth” out of trouble, but frankly you can “cut cost” your way out of trouble or even stabilize the financial situation?
3) Be aggressive -> reduce and cut none essential costs and even some essential things that don’t affect product or service delivery.
4) Once you start cutting non-essential and you go deep at cuts (including personnel) but recommend that as a last resort, and we have helped entrepreneurs cut out millions before even touching staff. We will expand on this topic in a future post on the specifics to cut and how.
5) At some point, you must stabilize the financial condition of the firm to get it to profitability or projected profitability before you can embark on attacking the revenue issues. The reason is that attacking the revenue problem will generally cost incremental dollars which if the firm is failing may not have the disposable cash to invest in that faucet right now. Another point if you invest in the revenue side before cutting cost, what if the marketing investment doesn’t work (ie. it doesn’t improve revenue), then the firm still has the high-cost structure and a failed marketing program on top of that.
Failing firms in our opinion that are established need to permanently adjust the cost structure to the current revenue very quickly. Once that’s done a real deep dive assessment of the revenue issues and effective execution of a “profitable” growth plan can help complete the comeback. By having a lower cost structure the firm will get more time to see which revenue improving strategy it can change to move the needle on the sales end.