Recognizing signs of failure - and strategies for avoiding it

According to the Small Business Administration, nearly 45,000 businesses close each month. Declining consumer confidence, massive layoffs, credit constraints and foreclosures are only part of the increasing pressure that will likely lead to record numbers of business failures, closures and bankruptcy in the coming years. Is there any light at the end of this tunnel?

Yes! Proactive positioning can make all the difference between survival and demise. Since my area of expertise is facilitating turnarounds, I will focus on five common reasons (even in a good economy) why small businesses fail. Many of these causes are preventable with proper planning, advice and education. Therefore, accounting professionals and trusted advisors are going to play a critical role in becoming the "first response" to aid in managing the crisis on behalf of your business clients.

FIVE REASONS BUSINESSES FAIL

1. Loss of revenue. Lost income and a declining customer base may be due to circumstances beyond your client's control, such as the current economic climate. This also may be attributable to other factors, such as pricing, location, declining market share, or even slow- or non-paying customers.

2. Poor business models. While losing revenue is problematic, it is most often because the original or existing business model is no longer viable. Business planning (and measuring) is essential to ensure that opportunity and competitiveness are optimized. A business model must also be executed properly for the entity to realize revenue.

3. Management/operational issues. Entrepreneurs by nature may not possess (or employ) the proper balance between ownership and management skills. If internal management is insufficient, the effects are usually strongly reflected on the bottom line.

4. Lack of capital. All businesses must have sufficient working capital. A business should strive to maintain a balance sheet that can support three to six months of payroll and operational expenses, to maintain a cushion for unforeseen loss or crisis.

5. Credit/debt issues. Many businesses have relied on access to easy credit in the form of lines of credit, credit cards, loans and home equity lines of credit to finance their businesses. Small businesses are now struggling as a result of tighter lending, high-rate credit cards, reduced lines and maturing loans, leaving many heavily burdened with mounting and high-cost debt. (I will discuss some alternatives to provide relief and substantially reduce debt exposure in the second part of this article.)

Any of these elements can wreak havoc on a business. Most would agree that the loss of revenue can damage a business the most. In addressing the loss of revenue, businesses and trusted advisors can begin by examining key factors such as operating expenses, receivables, pricing, service or product offering, and inventory to assess areas where cash flow can be improved.

Craig Szabo, CPA, of Szabo Accountancy in Calabasas, Calif., notes that, in his experience, loss of revenue is the key reason that businesses fail: "We have seen many more business failures, and everyone seems affected by the economy. We all used to have a cushion (savings, available credit lines and home equity); now, with credit so impacted, clients don't have the resources to salvage a business if it is distressed."

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