Arrow-right Camera


Reality Check On Business A Good Idea

Mon., June 23, 1997

While the failure rate for businesses is nowhere near the eighty percent number bandied about by “chicken licken” pessimists, the sad fact is that no enterprise, large or small, has a natural immunity to failure.

Q. I started my own business almost five years ago. While I never set the world on fire, I was able to meet my payroll, satisfy my creditors and pay myself a decent salary.

Lately, however, I’ve had a queasy feeling that things are “unraveling.” I still enjoy moderately good sales, but cash is hard to come by and this could be a loss year. How can I tell if I am on that proverbial “slippery slide” to oblivion?

A. You are at a point in time where this is a difficult call to make. The business is still young enough to be suffering the typical “ups” and “downs” that plague start-ups.

The old “feast or famine” syndrome tends to hang on in some businesses, but by no means is it a clear bellwether of failure. That is not to say, however, that you shouldn’t be concerned.

If your bookkeeper is frowning more than usual, if you’ve had to dip in your pocket frequently to meet a payroll, or the customer you were sure would come through just took a raincheck, it would be wise to do an operational “reality check.”

Sit down with your accountant and get an exact fix on your firm’s present financial condition. Income statements and cash flow reports that are six months old won’t help. You need sales, P&L; and cash flow information that is current.

Try to decipher relevant trends in sales. Are your “steady” customers still consistent? Where are new sales, if any, coming from? Are you maintaining an adequate gross margin between your revenues and your cost of sales? Is the margin adequate to cover your routine expenses?

Examine your sales cycle to see if it is taking too long to move from an initial customer contact to receipt of an order. Focus on those customer segments that are the most responsive and contribute the greatest amount to total sales and to your margins. Keep in mind, the “Pareto Principle” suggests that 80 percent of your sales come from 20 percent of your customers.

Also, revisit your break-even point to see if you are achieving the volumes necessary to support your operation. If not, you might have to consider trimming your product or service line to a core that gives the biggest bang for the buck.

Some serious reduction in costs and expenses might also be warranted. Are you buying at the best price? Do you really need everything you are paying for?

In addition, examine your own pricing policies. Are they in line with your break-even point and your competitors’ prices? What’s the price elasticity of your prime market? Maybe you’re not charging as much as customers are willing to pay.

Put together an aged payables list to see how much you owe and to whom you owe it. Be particularly scrupulous with respect to payroll taxes and sales taxes for which you might be personally liable. Make sure you haven’t been getting a free - apparently profitable - ride by ignoring your vendors or suppliers.

Be sure that you have the right employees doing the right jobs, and that they are organized, supported and motivated to provide the kind of productivity you need. Staff realignments or reductions might be necessary. Rank your employees according to their essentiality, productivity and overall performance. Aside from being your most important resource, your employees are generally your largest and most manageable expense.

Get a handle on your cash. Start a daily cash flow log to determine just where your cash is coming from and where its going. Are your “sources” adequate and your “uses” appropriate?

Get on top of your receivables. Are you collecting quickly enough? Making sales is one thing; getting the cash in hand is another. Customers who don’t pay are more damaging than prospects who don’t buy. Remember, “cash is king.”

Gather the troops together and brainstorm your situation. Structure the meeting on a positive note - your problems are yours and won’t be reduced by “sharing.


The following fields overflowed: CREDIT = Paul Willax The Spokesman-Review

Click here to comment on this story »