Understanding more about the financial performance of your company will help you see trends as they are developing and not wait until a crisis. Some problems are acute-they happen suddenly-and some are chronic-they go on for years and you learn to live with them. Here are seven situations that should put up red flags.
1. Little or No Revenue Growth.
Early-stage companies normally experience substantial growth as customers find you and your market enthusiastically. Then there is a leveling-off period when growth seems to slow and then stop. It may work to spend a short period at that plateau while you allow your business systems to grow to handle the volume. But then you must look at ways to get back on the growth path.
The reasons not to do so are understandable. You may be working 50 - 60 hours a week just to handle what you have and there is little time to find new clients, even if you thought you could handle their business. But growth is a necessity-because even with a reasonable level of inflation, flat revenues really mean a loss of revenues in terms of real dollars.
And, as you know, the costs to operate your business never go down. Rent, utilities, phone, and even postage are always going up. And wages too, including your own. As your employees become more experienced, you will want to pay them commensurate with their contributions, so raises are understandable, in benefits as well as salary. You may have added insurance and additional vacation time. All of this has a cost. And you need to replace and update equipment as well.
So what effect does flat growth have with this scenario? It lowers your profit. Costs become a greater percentage of revenue and ultimately profits become smaller. It may begin to create a serious cash squeeze and imperil your ability to pay debts and keep up with needed equipment purchases or repair.
2. Deteriorating Capital Base
Periods of flat growth in revenue can cause a negative cash flow. You need a steady stream of profit to allow cash to pay principal debt service and allow for reinvestment in new technology, equipment, or new project development.
After a fairly short time, you will find yourself in a double bind. You aren't generating enough cash to fund any meaningful growth and this lack of profits may prevent you from borrowing to fund it as well.
If you have gotten to this point, chances are your alternatives are few. One may be to look to outside investors for funds, although you may have to give up a good bit of control to get the capital you need. The other possibility is to sell off assets to raise cash. This may be a dangerous strategy, without considerable thought. You don't want to sell something you will need later on. Selling slow-moving inventory at a loss will affect profits as well as solvency.
3. Equipment Failures That Threaten Productivity
Not having positive cash flow will not just jeopardize growth; it will also affect current operations. If your equipment is not operating properly, your production may be slower, or quality not what you need or expect. In addition, total breakdowns will stop production and cause employees to stand around not accomplishing any work. This will raise your direct costs and lower profits even further.
4. Poor Employee Morale
Look around at your employees and give close consideration to what you see. Are they angry, disillusioned, or confused? Are they short of inventory, working on substandard equipment, or always fending off threatening phone calls? Are you communicating with them?
Surely you know that having good employees is a contributing factor in the growth and success of your venture. So it makes sense that when (and if) they feel negative, this will have the opposite effect. The most immediate result will be diminished productivity. People who don't care, show it. They take more time off and seldom think of ways to accomplish the task at hand more quickly or more efficiently. If wages are frozen or bonuses missed, the attitude becomes "What's the use?" And your job becomes tougher because the need to communicate becomes more urgent.
And remember as well, your employees are often the public face of your company. If they have gripes, that's where they may air them. I still remember traveling on TWA Airlines in the midst of its most difficult times. All you heard from employees were complaints and dissatisfaction. It made the trip uncomfortable and forced me, a fairly frequent flyer, to look at other airlines. I wasn't the only one, and the loss of business further hurt the weakened airline.
There are not merely business reasons to care about the concerns of workers. There are human reasons as well and you want to keep a sense of community in your company.
5. Unpaid Taxes
No business owner sets out to get into trouble with the tax collector. Most of us have enough sense to know how painful that can be. But it may start accidentally and grow quickly. It often starts with a single payroll when the money isn't fully available. Paychecks are issued with the expectation that withheld taxes will be covered as soon as customers begin to pay outstanding invoices. But by the time these payments are received, other bills have to be paid or another payroll is coming up. Before you know it, taxes are owed and the money just isn't there. Now you are on dangerous territory.
First of all, many taxing bodies have the power to collect that exceeds those of ordinary creditors. They can make a demand for payment, file a lien, and execute a levy on your bank or even your customers in record time. They are effective collectors.
Second, the financial burden grows very quickly, particularly if unpaid returns are not filed. For federal taxes, there are penalties both for failure to file and for failure to pay-5% per month. So, in the end, you won't just be paying the tax, you will be paying back the tax plus penalty and interest.
Another consideration is the possibility of personal liability. If you are the responsible officer, that is, the one who makes the financial decisions, an assessment can be made against you as well as your company. Then the collection actions will be aimed at your assets.
And if all this weren't enough to motivate, there is also the matter of criminal prosecution. It is unlikely for payroll taxes, but it is far more frequent for not remitting sales tax. That is often charged as theft, as the money belongs to the state, not your company. If your business has found itself in this kind of trouble, see a professional as soon as you can. This is one problem you can't ignore!
6. Failure or Closing of Major Customer
Most new businesses are warned about becoming dependent on a single customer or even a few. That is easy in theory, but often difficult in practice. When a customer offers you a lot of business, it isn't easy to turn it down. If you are in an industry where there are only a few players of any size, this may be your reality.
If it is and one of these major customers cuts back operations, files for reorganization, or closes, your entire business may be jeopardized. So pay attention to what is happening within the industry as well as with your customers.
If payments get slower, take some action. If the company is big enough, the accounting side does not talk to the purchasing side, so you won't lose the business. Anyway, if you're not going to get paid, you don't want the sale. I had a client who was a small electrical contractor who allowed a major Fortune 100 company to get so far behind that my client had to file bankruptcy. Minimize your exposure.
If orders slow down, don't wait until they stop: Get out and look for new business. At the same time, keep your lines of communication up with your customer. These are the times when you have to work hard just to stay even.
7. New Technology Creating Pricing Pressure
The landscape of America is full of rusted plants, some of which are still partially in operation. It's impossible to believe that they could be efficient. Jobs that were done by workers are now being done by robots. Planning production is done by computer. Inventory and shipping are managed by scanners. The years bring new technology: If older companies cannot afford to keep up, they are likely unable to compete.
Labor-intensive businesses must be able to avail themselves of labor-saving devices. Pricing pressures come from those domestic companies that can afford to do so in addition to the offshore operations that use low-cost labor. Staying in business without making a profit makes little sense.
These are not the only serious problems a company can run into. I could write a book about the perils of the dot-com companies, their overuse of venture capital and underuse of business models. Regardless of how new an idea is and how clever the folks who thought it up, business is now and will always be about revenue exceeding costs and creating profit. This is not a theory; it is a reality and you must have a stream of income.
The latest and greatest idea may come and go, but at the end of the day, it's hard work and good dealings that secure the future for most businesses.
If any of the above scenarios sound "too close for comfort," get practical solutions to your business's problems in Second Wind: Turnaround Strategies for Business Revivalby Suzanne Caplan.
Excerpted with permission from Entrepreneur Press, copyright 2003.