IMGCAP(1)]According to the Small Business Administration, nearly 45,000businesses close each month. Declining consumer confidence, massivelayoffs, credit constraints and foreclosures are only part of theincreasing pressure that will likely lead to record numbers of businessfailures, closures and bankruptcy in the coming years. Is there anylight at the end of this tunnel?
Yes! Proactive positioning can make all the differencebetween survival and demise. Since my area of expertise is facilitatingturnarounds, I will focus on five common reasons (even in a goodeconomy) why small businesses fail. Many of these causes arepreventable with proper planning, advice and education. Therefore,accounting professionals and trusted advisors are going to play acritical role in becoming the "first response" to aid in managing thecrisis on behalf of your business clients.
FIVE REASONS BUSINESSES FAIL
1. Loss of revenue. Lost income and a declining customerbase may be due to circumstances beyond your client's control, such asthe current economic climate. This also may be attributable to otherfactors, such as pricing, location, declining market share, or evenslow- or non-paying customers.
2. Poor business models. While losing revenue isproblematic, it is most often because the original or existing businessmodel is no longer viable. Business planning (and measuring) isessential to ensure that opportunity and competitiveness are optimized.A business model must also be executed properly for the entity torealize revenue.
3. Management/operational issues. Entrepreneurs by naturemay not possess (or employ) the proper balance between ownership andmanagement skills. If internal management is insufficient, the effectsare usually strongly reflected on the bottom line.
4. Lack of capital. All businesses must have sufficientworking capital. A business should strive to maintain a balance sheetthat can support three to six months of payroll and operationalexpenses, to maintain a cushion for unforeseen loss or crisis.
5. Credit/debt issues. Many businesses have relied onaccess 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 manyheavily burdened with mounting and high-cost debt. (I will discuss somealternatives to provide relief and substantially reduce debt exposurein the second part of this article.)
Any of these elements can wreak havoc on a business. Mostwould agree that the loss of revenue can damage a business the most. Inaddressing the loss of revenue, businesses and trusted advisors canbegin by examining key factors such as operating expenses, receivables,pricing, service or product offering, and inventory to assess areaswhere cash flow can be improved.
Craig Szabo, CPA, of Szabo Accountancy in Calabasas,Calif., notes that, in his experience, loss of revenue is the keyreason that businesses fail: "We have seen many more business failures,and everyone seems affected by the economy. We all used to have acushion (savings, available credit lines and home equity); now, withcredit so impacted, clients don't have the resources to salvage abusiness if it is distressed."
Revenue loss coupled with being over-extended is a deadlycombination. Improving upon these conditions is predicated on howprepared a business is to handle loss, utilize available resources andmanage cash flow. Owners who suffer revenue loss often begin to managetheir businesses from a cash-at-hand position. Remember that bankbalances and cash balances are two different forms of cash. Rarely willthey ever resemble each other. Be clear on cash projections so they canbe utilized for improvement. Accountants can play a vital role inproviding this sort of cash management and measuring the results ofchanges needed to help in stabilization.
In concert with this, the business model and plan needs tobe carefully evaluated to determine if the present business model isstill viable.
Michael Stoddard, CPA, of The CPA Network, in Provo, Utah,has always advised his clients to review their business modelsperiodically to ensure viability. Now more than ever businesses must beencouraged to proactively plan to enable survival and ensuresustainability. This should include careful and realistic assessmentsof, and improvements to, business models, management skills andfinancial stability.
In evaluating business models, Stoddard asks, "Can themodel generate revenue? if not there is little hope. If it can, you canalways fix it." Doing so has its price, and may call for tough choicessuch as downsizing, repricing and reducing debt.
Timing is essential in making changes during a crisis,first to identify the key issues, and then to implement measurableactions. Unfortunately, as advisors, we are sometimes called in toolate. If a business is exhibiting signs of failure, one should notforget that even the best entrepreneurs don't wear a big red "S" ontheir chest. If things have gone from bad to worse, that would be anopportunity for the advisor to begin forming (or executing) adissolution plan that can wind down a business cost-effectively andproperly.
Yet another factor in the deterioration of business modelsis managerial weaknesses. The Dun & Bradstreet Business FailureRecord states that "incompetence, unbalanced experience and lack ofmanagerial experience create issues in areas such as operatingexpenses, receivables and inventory."
Other key issues include overstretched and overstressedowners and personnel. Brad Marks, chief executive and founder of BradMarks Enterprises, a Los Angeles-based executive search firm, feelsthat owners need to seek means to strengthen cash positions so that keypersonnel can be retained, rather than discarded and later replaced atsignificant cost. He suggested examining both fixed and unfixedoperational expenses prior to considering layoffs.
Even now, growth opportunities are plentiful, but notwithout working capital, and lack thereof can halt even a strongbusiness model. In tougher climates and without good cash management, anormally well-capitalized business can rapidly turn undercapitalized.
Compensating for that deficiency is where problems canarise. Once again, enabling reserves and building up balance sheets candetermine survival in lean times. When it comes to utilizing credit,many owners lack understanding of appropriate options and the costsassociated with borrowing. Without credit or collateral, lendingoptions are too few; some report that even venture capital activity isat a 12-year low.
DEALING WITH DEBT
Then there is the matter of debt. In my experience, thiscan be a silent killer, and one that can be truly devastating to thefinances and morale of a business.
When squeezed with higher rates, or diminished cash toafford payments, many businesses adopt a knee-jerk reaction to fixingthe problem. One typical response is to appeal to creditors in hopes oflowering interest rates, or reducing payments. Most will find thatcreditors are unsympathetic, and some of the few relief programsoffered can take up to five years to complete and are null if defaultedupon. A worse response is to become non-compliant with tax filings orpayments. We have seen a significant rise in clients with large amountsowed in back taxes. Debt is so stressful when not managed that it cantake focus off making money and use valuable resources in dealing withdemanding creditors.
However, there is a viable option to strengthen cash flowand reduce liability exposure called business debt negotiation that canprovide significant financial relief to the business debtor. In thesecond part of this article in the next issue, I will provide specificdetails about this option, which can strengthen balance sheets andenable recovery for small and midsized businesses.
Christine Janklow is president of SettleSource Inc. (
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