Signs of a Drowning Company

01.WMATA.UnionStation.NE.WDC.25March2010
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Very few entrepreneurs want to close their business. Sell, yes. Merge, maybe. Shut it down, I doubt it. The reality is that more than 50% of all new companies opened in the U.S. and Canada close within the first three years. That means you need to know when, in fact, it may be best to cut your losses and get out.

Yes, it might happen to you. It’s happened to me so I’m speaking from a lot of experience here. Perhaps the single biggest obstacle to overcome is to accept the reality that when you start a business, you need to be prepared to close it. You should have included in your initial business plan a formula or timeline with a set of criteria to determine if the goals you feel are necessary to survive are being met.

In many ways, knowing when it may be time to close down a business is a particularly tough call for a small businessperson. Not only do large corporations have significantly greater resources to address potentially fatal problems, but the lone wolf mentality that allows an entrepreneur to flourish can also blind him/her to reality. A business owner has to go into operating a company with an attitude that says “I am excited and I will succeed” but they also must be aware of the possibility that the company may not survive. A true entrepreneur often gets emotionally attached to their company because of the passion and efforts needed to make it even have a chance to succeed. Unfortunately that emotional attachment can also cause them to not see what is actually a sinking ship and not just a rough sea.

Keep the following points in mind. They don’t mean the ship is necessarily going down, but noticing them may allow you to reverse a bad situation that will sink the ship you worked so hard to keep moving full steam ahead.

Cash Flow. You know full well that you need to turn a profit to stay in business. But take that precept a step farther and keep a close eye on your cash flow. If, for instance, you’re struggling to balance income and outgoing expenses on a monthly basis, that may be a signal that things are simply too tight to continue for long. In particular, watch for cash flow problems that persist for several months in a row. This could be the start of a huge tailspin that needs to be stopped immediately, or it’s time to bail out.

Quality Issues. Numbers can be a powerful signal that a business is genuinely struggling. Equally compelling are signs that will never appear on a balance sheet. An increase in customer complaints, for instance, may hint at problems with products or services that may ultimately bring down an operation — particularly troubling if you’ve already taken steps to try to address what’s wrong. If you’re losing customers or, by contrast, find existing customers cutting down on their business, that too may signal a potentially fatal flaw. Again, this can be reversed, so don’t just give up on quality issues.

Lying to yourself. As a manager or owner of a business, you need to be optimistic and get through inevitable tough times. But that should never slide to the depths of delusion or being dishonest to yourself. Little lies to yourself turn into big lies then you can’t figure out where you truly stand.

Let me give you an example from my own experience. I once made a hire of a fairly high paid employee. He had a diverse background, lots of contacts and seemed well worth the money. Unfortunately, I had this notion that I could convert a technical guy with project management experience into a consultant that could also bring me business. Well, let’s just say it was never going to happen but I kept lying to myself and saying that he’s got the ability but he’s just not catching on as quickly as I wanted. A year and a half later of a lot of wasted time (I re-did most of his work) and money ( I took a pay cut in hopes of this guy eventually bringing me a lot of business as promised) my little lies to myself turned into a few huge problems. Don’t get into this rut.

Lies on paper. Fibs limited to your inner monologue are one thing; distortions of the truth that make their way onto documents and other company material take that red flag to a whole new level. Ever hear of Enron or WorldCom? Fudging company numbers in a struggle to keep things looking positive is a bona fide signal that things may be beyond salvaging. And you will get caught if this is being done to lie to a bank or other lender. Not only won’t you get the money, but you may be blocked by anyone else that gets wind of your ways, especially if it ends up in a credit report.

Excessive turnover. Employees can often see a failing business more readily than the owner. The sign that this may be the case is an unforeseen exodus by multiple employees at the same time. If this seems to be the case, ask in exit interviews if they have concerns about the long-term viability of the company. Sometimes this could just be a great maneuver by a slick competitor to take your best people or it could also just be a rumor mill that has people running scared about nothing. Find out for yourself with the exit interviews and maybe some department meetings on employee concerns.

Excessive price cuts. If you find yourself slashing prices more than you thought you would, that implies a desperation that may be fatal — if for no other reason than you’re cutting into your profit margin.

Paying with plastic. If you’re resorting to a credit card to meet payroll, you’re only adding to a debt level that’s ultimately going to strangle you. Don’t bankroll your payroll with a credit card. A Visa card is not the answer to meet payroll unless you are purposely trying to dig yourself a debt grave. Find out exactly why you don’t have the cash. Slow payers? Lack of work? Too much R&D spending? It could be a number of things and each of them has their own way to be fixed. The key here is- when you are ready to hire employees, you should get yourself a line of credit from a bank that will cover 2 months worth of payroll, benefits and taxes if possible. At least a month’s worth.

Too much stress or not enough happiness. Keep an eye on yourself as well. If the business is killing you- trouble sleeping, short temper and the like- that can signal a business that may not be worth keeping afloat. Remember your enthusiasm to get working everyday when you started the company? Well, you can’t expect to have the same exact passion a few years down the road but you sure should expect to get up in the morning to see how your personal creation of a money machine is doing. You got in it for freedom, or money, or creativity or something that made you feel good about yourself. If you’re still not at least a little pumped for a new business day, you might have a problem on your hands.

Knowing signs of trouble may allow you to head problems off in time. Listen to those closest to you for guidance and counsel — not merely for potentially fatal flaws but insight that may solve the problem before it becomes terminal. Talk to your advisors, your lawyer and accountant. They can often tell you when your business is in real trouble. Friends and family members can also often see the signs without even being involved in the business, but by being involved with you.