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It happens. Businesses get into trouble. You find yourself in a cash crunch. You can’t pay your bills -- or worse, you struggle to make payroll. It is a tough spot to be in. However, we have helped many businesses find their way back into the light. To do this, you’ll have to make some difficult decisions and you will need to take decisive action to save your business.
We’ll give you some general thoughts and some examples on how to address your most pressing needs. However, if you are in trouble, it may be a good idea to reach out to an expert for help. Don’t delay. These situations most often do not fix themselves and there is a point of no return.
That is, make sure that the price you receive for your product or service exceeds what it costs you to deliver an incremental unit (e.g., make one more widget or perform one more hour of service). Do this for every product, if you have multiple products. If you price customers differently, the analysis must be done at the customer level. When you find situations with a negative variable contribution, increase the price, reduce the cost of providing the incremental unit or stop offering that product or service. There may be rare exceptions to this rule, but in general, you have got to ensure that you are making money to cover your overhead on each sale.
2. Cut costs.
To stay in business, you will likely have to reduce your costs. First, eliminate all discretionary spending. The summer outing or the company holiday party need to go. Next, look to non-people costs. Can you reduce what you pay for travel costs or utilities? The landlord may be willing to reduce rent, at least for a time, if the alternative is empty space because you are out of business.
Unfortunately, cutting costs may well involve the difficult decision to lay off people, reduce their hours or reduce compensation. Austerity measures are never easy, but if the alternative is closing your business, it will be better to keep some people employed than for everyone to lose their jobs when the company shuts the doors.
3. Prioritize your payables.
You owe more than your available cash. Therefore, you must prioritize what to pay. We suggest prioritizing in the following order:
First, pay any obligations that will shut your business down if you don’t pay them. For example, if you don’t pay your employees, they will likely leave to find work with employers who can pay them. If this leaves you unable to deliver your product or service, you’ll be out of business. Paying employees is typically a top priority. Also, think about those vendors who supply needed materials.
Next, prioritize items that will result in large penalties. For example, not paying taxes in a timely manner can sometimes result in massive fines. Avoid these if possible.
Third, any payment that is late should be next in line while, finally, prioritize payments that are not yet late last.
Once you have prioritized your payables, assess the cash you have and the receivables you expect to collect. Then build a detailed cash flow plan that lays out who you will pay, when you will pay them and how much you will pay them.
It's tempting, when you owe money you can’t pay, to ignore the situation and hide. This is almost always a mistake. Call your creditors, explain your situation and your plans to pay your debt. Most people are willing to work with you if they believe that you will eventually pay what you owe.
If you have bank debt and will break a covenant, either because you will miss a payment or because some other requirement will not be met (e.g., liquidity requirements), proactively communicate with your banker regarding your situation. Remember, your banker is primarily interested in being repaid. The bank will likely only call your loan if it assesses that there is little hope of being repaid otherwise. If you proactively go to your banker with a sound plan to improve your financial situation and repay the loan, he/she is highly likely to work with you.
The five tips will help you effectively triage your priorities when your business is struggling. However, don’t wait until it is too late to take action. Move quickly to get your business back on the right track.
Andries van Tonder is fulltime internet entrepreneur since 2013
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