Most business owners know when they are in trouble, but often do not take action early enough. Many factors can contribute to ‘distress creep’ for businesses. The legislative pressure brought to bear on some businesses by the Sarbanes-Oxley act and – of being pushed – or dragged – into the world economy, are just a couple.
Just as important is that business owners do not communicate their distress to others who can help them. Many entrepreneurs I have personally dealt with are intelligent, strong-willed, and resourceful with a go-it-alone attitude. They feel they personally got their company to where it is, and ‘by gosh, they will get it out of trouble.’
What signs will give a business owner a clue that their business is at risk? The following six red flags are good indications that your company may be distressed:
- Fast Growth without a Proper Framework: It doesn’t matter which industry you are in, sheet-rock hanging, the automobile business, or a service business. The rainmaker brings in the business with the expectation operations can produce the work. If the infrastructure to support the rapid growth is not there, the company may suffer significant financial losses, and a loss of its reputation. Here are some common issues: The company assigns inexperienced employees to handle managerial-level work; accounting is not ready to “keep up” with the pace, resulting in poor financial information and cash flow problems. The remedy: Work with a business plan that will bring the company from today to tomorrow, rather than letting the sales-tail run the show.
- Purchases made without forethought: Instead of plowing the profits back into the business for growth and stabilization, money is spent for frivolous perks. My recommendation: Management should stay the course with the business that pays the bills and resist the urge to “ego buy.”
- Revenue planning based on one source of income: How many times have you looked at your revenue stream to determine where the business is coming from? If a few customers account for a large percentage of your gross profit, management should have a plan to downsize quickly if that customer base is eroded. It’s great to have large accounts, but it may be better to have several mid-size accounts that will not cripple the business if one or two of them decide to go elsewhere.
- Inadequate capitalization: “We started this company on my kitchen table with 500 bucks!” Yes, and that was 10 years ago and annual sales were over $5 million last year. That $500 is still the only thing in the stockholder’s equity section besides the retained earnings. Many owners underestimate how much capital is needed to start the business and keep it running during the ups and downs of any business cycle. The solution: Determine how to finance fixed assets, time major purchases, plan for today and next year create a business plan that includes budgets and projections.
- Improper cost estimation: Not only did we blow the cost estimate, but also we incorrectly matched revenue to the cost of that revenue: usually a relatively simple calculation. What did we miss and why? What went wrong? A strike, rain, plain poor estimating? The internal controls and accounting processes in place must tell management the story. Not just at the end of a job, but as the job is being produced or constructed. Management should review the results with the estimates. Accountability is the name of the game.
- Expansion into product times that do not fit the business model: How often have we heard the story of how great some company was until they decided to expand into another business outside their expertise or abilities? Management should focus on what the company does best.
All businesses have tripped over at least a few of the trappings, addressed them and come out shining. If your company may be experiencing one or more of the signs listed above, it does not mean you are seriously in trouble. But it is certainly a sign that the time has come for a “business health checkup.”