7 Signs of Trouble That Can Threaten a Business

Is your business performing as well as you'd hoped? Review these seven challenging business conditions to determine if your company needs a rescue plan.

Understanding more about the financial performance of yourcompany will help you see trends as they are developing and notwait until a crisis. Some problems are acute-they happensuddenly-and some are chronic-they go on for years and you learn tolive with them. Here are seven situations that should put up redflags.

1. Little or No Revenue Growth.
Early-stage companies normally experience substantial growth ascustomers find you and your market enthusiastically. Then there isa leveling-off period when growth seems to slow and then stop. Itmay work to spend a short period at that plateau while you allowyour business systems to grow to handle the volume. But then youmust look at ways to get back on the growth path.

The reasons not to do so are understandable. You may be working50 - 60 hours a week just to handle what you have and there islittle time to find new clients, even if you thought you couldhandle their business. But growth is a necessity-because even witha reasonable level of inflation, flat revenues really mean a lossof revenues in terms of real dollars.

And, as you know, the costs to operate your business never godown. Rent, utilities, phone, and even postage are always going up.And wages too, including your own. As your employees become moreexperienced, you will want to pay them commensurate with theircontributions, so raises are understandable, in benefits as well assalary. You may have added insurance and additional vacation time.All of this has a cost. And you need to replace and updateequipment as well.

So what effect does flat growth have with this scenario? Itlowers your profit. Costs become a greater percentage of revenueand ultimately profits become smaller. It may begin to create aserious cash squeeze and imperil your ability to pay debts and keepup 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 principaldebt service and allow for reinvestment in new technology,equipment, or new project development.

After a fairly short time, you will find yourself in a doublebind. You aren't generating enough cash to fund any meaningfulgrowth and this lack of profits may prevent you from borrowing tofund it as well.

If you have gotten to this point, chances are your alternativesare 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 thecapital you need. The other possibility is to sell off assets toraise cash. This may be a dangerous strategy, without considerablethought. You don't want to sell something you will need lateron. Selling slow-moving inventory at a loss will affect profits aswell as solvency.

3. Equipment Failures That Threaten Productivity
Not having positive cash flow will not just jeopardize growth; itwill also affect current operations. If your equipment is notoperating properly, your production may be slower, or quality notwhat you need or expect. In addition, total breakdowns will stopproduction and cause employees to stand around not accomplishingany work. This will raise your direct costs and lower profits evenfurther.

4. Poor Employee Morale
Look around at your employees and give close consideration to whatyou see. Are they angry, disillusioned, or confused? Are they shortof inventory, working on substandard equipment, or always fendingoff threatening phone calls? Are you communicating with them?

Surely you know that having good employees is a contributingfactor in the growth and success of your venture. So it makes sensethat when (and if) they feel negative, this will have the oppositeeffect. The most immediate result will be diminished productivity.People who don't care, show it. They take more time off andseldom think of ways to accomplish the task at hand more quickly ormore efficiently. If wages are frozen or bonuses missed, theattitude becomes "What's the use?" And your jobbecomes tougher because the need to communicate becomes moreurgent.

And remember as well, your employees are often the public faceof your company. If they have gripes, that's where they may airthem. I still remember traveling on TWA Airlines in the midst ofits most difficult times. All you heard from employees werecomplaints and dissatisfaction. It made the trip uncomfortable andforced me, a fairly frequent flyer, to look at other airlines. Iwasn't the only one, and the loss of business further hurt theweakened airline.

There are not merely business reasons to care about the concernsof workers. There are human reasons as well and you want to keep asense of community in your company.

5. Unpaid Taxes
No business owner sets out to get into trouble with the taxcollector. Most of us have enough sense to know how painful thatcan be. But it may start accidentally and grow quickly. It oftenstarts with a single payroll when the money isn't fullyavailable. Paychecks are issued with the expectation that withheldtaxes will be covered as soon as customers begin to pay outstandinginvoices. But by the time these payments are received, other billshave to be paid or another payroll is coming up. Before you knowit, taxes are owed and the money just isn't there. Now you areon dangerous territory.

First of all, many taxing bodies have the power to collect thatexceeds those of ordinary creditors. They can make a demand forpayment, file a lien, and execute a levy on your bank or even yourcustomers in record time. They are effective collectors.

Second, the financial burden grows very quickly, particularly ifunpaid returns are not filed. For federal taxes, there arepenalties both for failure to file and for failure to pay-5% permonth. So, in the end, you won't just be paying the tax, youwill 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 thefinancial decisions, an assessment can be made against you as wellas your company. Then the collection actions will be aimed at yourassets.

And if all this weren't enough to motivate, there is alsothe matter of criminal prosecution. It is unlikely for payrolltaxes, 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 oftrouble, see a professional as soon as you can. This is one problemyou can't ignore!

6. Failure or Closing of Major Customer
Most new businesses are warned about becoming dependent on a singlecustomer or even a few. That is easy in theory, but often difficultin practice. When a customer offers you a lot of business, itisn't easy to turn it down. If you are in an industry wherethere are only a few players of any size, this may be yourreality.

If it is and one of these major customers cuts back operations,files for reorganization, or closes, your entire business may bejeopardized. So pay attention to what is happening within theindustry as well as with your customers.

If payments get slower, take some action. If the company is bigenough, the accounting side does not talk to the purchasing side,so you won't lose the business. Anyway, if you're not goingto get paid, you don't want the sale. I had a client who was asmall electrical contractor who allowed a major Fortune 100 companyto 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 andlook for new business. At the same time, keep your lines ofcommunication up with your customer. These are the times when youhave to work hard just to stay even.

7. New Technology Creating Pricing Pressure
The landscape of America is full of rusted plants, some of whichare still partially in operation. It's impossible to believethat they could be efficient. Jobs that were done by workers arenow being done by robots. Planning production is done by computer.Inventory and shipping are managed by scanners. The years bring newtechnology: If older companies cannot afford to keep up, they arelikely unable to compete.

Labor-intensive businesses must be able to avail themselves oflabor-saving devices. Pricing pressures come from those domesticcompanies that can afford to do so in addition to the offshoreoperations that use low-cost labor. Staying in business withoutmaking 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 whothought it up, business is now and will always be about revenueexceeding costs and creating profit. This is not a theory; it is areality and you must have a stream of income.

The latest and greatest idea may come and go, but at the end ofthe day, it's hard work and good dealings that secure thefuture for most businesses.

If any of the above scenarios sound "too close forcomfort," get practical solutions to your business'sproblems in Second Wind: Turnaround Strategies for BusinessRevivalby Suzanne Caplan.


Excerpted with permission from Entrepreneur Press, copyright2003.

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