Crisis Control

By Frances McGuckin

“Things aren’t going the way we planned,” said David to his partner, Jennifer. “We didn’t factor in the drop in the US dollar and quite frankly, the business isn’t producing like our business plan predicted. I’m really worried.”

“What will we do?” asked Jennifer. “We can’t get any more loans. How do we control this chaos?”

Many factors that were not planned for affect businesses – consumer buying patterns, global affairs, sudden growth or too-slow business growth. The smart entrepreneur has control of the financial reins and monitors financial figures, trends and cash flow carefully.

Below are 10 immediate steps you can take to control the chaos. It’s no use pouring money into a leaky pail if there is no way to plug the holes. On the other hand, decisive actions could well get you through this situation. There are steps that you can immediately take to ease the mental stress while you regroup and decide on a course of action.

Step 1: Review gross profit margins

Gross profit margins can decrease unnoticed if they are not constantly monitored. Review the cost of goods sold and all related expenses to see which ones are contributing to decreasing margins.

Estimate through your accounting records how costs have increased this year, noting these increases. Review factors such as pricing, raw material costs, wages, packaging costs and methods, direct selling costs, discount structures, commissions, and employee unproductiveness, as inefficiency in any one of these areas causes lost profits.

Step 2: Review overhead expenses

Print out a detailed general ledger report for the year and examine each expense account. Take five differently coloured highlighters, and as you review each account, use them to track these categories.

1. One-time expenses that will not reoccur within the next 12-month period
2. Expenses that were unnecessary or frivolous
3. Expenses that have increased in the last fiscal year (example: wages)
4. New and ongoing expenses (example: extra telephone line)
5. Expenses that could be reduced (example: travel).

When you have completed analysing each of the above, total each category. Add together the expenses in items one and two. You have now separated one-time and frivolous costs from your figures. Re-total each general ledger account, minus these expenses, to give you a better indication of normal operating costs. Study this amount to see how it has affected your profits.

Then total the expenses in items three and four. You will need this information to plan your revised budget. How can you reduce these costs? Then review the expenses highlighted in item five to see how they can be reduced without affecting efficiency. Calculate the total of these extra expenses to see how much they contributed to reduced profits.

Step 3: Prepare a bare-bones budget

You now have all the information you need to calculate a conservative budget. Prepare monthly projections for six to 12 months, using statistical sales history combined with expectations from future marketing strategies, to see how much profit can be generated.

You will need this information to negotiate with suppliers and various tax agencies. If your budget involves laying off employees, ask your accountant to calculate the full cost of a layoff, as it can be an expensive exercise and you need the available funds.

Step 4: Review marketing strategies

Although you now have to be frugal, a business will not sustain sales without some aggressive marketing techniques. Review how your marketing dollars were spent and how effective the results were. Seek free marketing advice from organizations such as your Canada Business Service Centre or Community Futures Development Corporation.

Step 5: Review cash flow

Projecting future profits doesn’t take care of paying the current bills, so your cash-flow situation needs attention. Your accountant can help you to interpret the financial statements and accounting records and help with your decision-making.

You will you need to analyse your current cash position and how much of the accounts receivables are collectable – and in what time frame. Inventory levels must be sufficient to meet future projected sales. Calculate future requirements based on your projections. Then identify slow-moving items and hold a clearance sale.

Assess whether any equipment needs repairing or if any major asset needs to be purchased in the next few months. List accounts payable, taxes, state and federal payroll commitments, and monthly loan payments due. Identify those that are delinquent and the amounts, then prioritize the payments.

Finally, calculate your current working capital position by totalling current assets and current liabilities. If current liabilities exceed current assets, you now know the amount that you are short to meet your obligations, and can plan a course of action based on your projections. This exercise also allows you to plan how you will approach the various creditors and to what level you may have to further reduce expenses.

Step 6: Deal with tax agencies

Be open and honest in dealing with the various tax departments; they are usually cooperative. First know how much you owe them and how late the accounts are. Before you contact them, prepare a budget to estimate how much you can pay monthly. At the same time, you must commit to maintaining current payments.

This can be achieved by transferring the tax portion of each bank deposit into a tax savings account. In fact, always use this system to ensure that tax monies are available. If taxes are behind, call the collection department of each tax agency to explain your financial situation. They will ask for a payment plan, financial figures and your budget.

If you miss one payment or the cheque bounces, don’t expect any sympathy, but do expect your bank accounts to be frozen or the money taken from them. If you have accrued a huge sum of interest, write to Canada Customs and Revenue Agency’s Special Appeals Committee.

Step 7: Deal with suppliers

Review each supplier’s account to see what payment terms you can offer, as you need their cooperation in maintaining your supplies to continue business. Look at the situation from their perspective – they can’t keep supplying you with products or services without a structured repayment plan. Perhaps you can offer to pay a small amount each month off the old debt, with new purchases being paid for C.O.D. Call them before they call you – turn a negative into a positive.

If you honour your commitments and pay the overdue accounts, credit is usually restored. If not, and you are an incorporated company, trade suppliers usually lose any outstanding debts on bankruptcy. If you are a proprietorship, they can take you to court. Your personal assets are then at risk.

Step 8: Turbo-charge collections

Some of your problems may be the result of lax collection procedures. Many small businesses suffer because one large customer went “belly-up.” So, review your current outstanding accounts receivable, breaking them down into current, 30, 60, 90 days and over. Starting with the 90 days and over, call each overdue customer. Get the potential bad debts before they are not recoverable.

Step 9: Assess yourself

Continuing a business in crisis mode is both mentally and physically exhausting, but it can be done. Many struggling businesses have made successful transitions because owners have made concerted efforts.

Ensure you are ready to face the challenges ahead and be confident that you can do it. Without this commitment, it won’t happen. You have come this far in making your entrepreneurial dream a reality. Are you ready to fight to keep your dream alive, or ready to let it go? Only you can make this choice.

Before you make any final decisions, assess whether you are ready to move forward. Answer the following questions: Am I ready to make a committed, concentrated effort? Do I feel physically and mentally positive and ready to handle this? Will I follow professional advice and learn from past mistakes? Could I further endanger our financial stability?

Step 10: Know your options

Finally, you must understand all the available options. A business that has experienced sudden and unexpected growth will face different challenges than one that is struggling to survive. A growing business with long-term potential has many opportunities to seek external help to work through its problems.

A business in chaos could be heading for failure. You can often survive this chaos and succeed by seeking professional help before it is too late.

This article is based on the book, Big Ideas for Growing your Small Business (Canada) by award winning Small Business expert and international speaker Frances McGuckin. To obtain your own copy of her book just visit our secure online store here.