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
“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
Step 2: Review
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
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
Step 5: Review
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
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.
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
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
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
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
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
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.