Getting In Deep Trouble; Why Companies Get There, and What it Takes To Recover

All businesses in trouble share two characteristics: denial and perseverance in the face of inescapable change. It’s easy to believe in what worked in the past, and hard to step outside our comfort zone and do things differently.

Businesses suffer from information overload, just as individuals do. Big surprise since businesses are made up of people. When companies get into trouble, day-to-day management of immediate crises (like finding enough cash for payroll) consume managers. Their ability to identify opportunities and problem solutions decline because they can’t see past the next phone call from an irate creditor or reluctant supplier. Pretty soon, they’re paralyzed by action. Managers and staff alike are frantic, but nobody addresses the fundamental changes that get companies in trouble in the first place.

A business owner once looked me straight in the eye as he told me that he had to sell his product for under what it cost to produce it. Why? Because that’s what his competition was doing, he said. Denial and perseverance. The fact that he was liquidating his net worth a little at a time and working for less than he could have made at McDonalds wasn’t really something he’d focused on.

The owner of a business can’t afford to shut out critical information just because there doesn’t seem to be time to consider its significance. Ignorance can kill.

Like the frog that won’t hop out of water if the temperature is raised slowly to boiling, many companies seem all too willing to cook rather than change with the business environment.

There are a lot of reasons businesses boil rather than hop out. The five most common ones that I’ve seen in my work with troubled companies include:

Seems like a simple question, right? What are your goals for your business? Can you measure them? By when do you want to achieve them?

Think about it. How do you know if you’re succeeding if you don’t have tools to measure success and keep you focused on where you want to go? Most businesses that get into trouble have never answered this question and companies jumping into the snowboard business today are often prime example.

Business goals are measurable and realistic. They can always be quantified; an increase in sales, gross profit percentage or dollar sales per employee. Don’t be constrained by traditional measures. If it meets the criteria, works for your business, and keeps you focused, it can be a goal.

Does anybody doubt that IBM could have dominated the PC market if they had decided to do it early enough? Bill Gates offered them a chance to buy the rights to MS-DOS and they turned him down. Oops.

It’s easy to keep doing what has worked for you in the past. Everybody likes to stay in their comfort zone. A dramatic change in the way your business operates involves perceived risk and is inevitably disruptive and messy. Building an organization that is receptive to change, so that change is ongoing and incremental instead of chaotic, is a critical ingredient of business success.

No, we’re not talking a crook or a psychopath. Like all of us, business executives have strengths and weaknesses. The strengths that allowed Steve Jobs to establish and build Apple Computer became, in the judgment of some, liabilities when it was time to manage the larger, corporate organization that Apple became.

Perhaps individuals who establish and build companies come to believe in and depend on themselves too much. They are often right to think that they can do anything in the organization better than anybody else. Trouble is, they can only do one thing at a time, and this hands-on-everything approach creates a bottleneck at their door and discourages other employees from taking the initiative to solve problems.

“Inadequate Accounting System Scuttles Company” isn’t the kind of headline that boosts circulation, but it should be obvious that you can’t run a business without current, accurate information.

A company I was hired to turn around was operating two businesses on one accounting system. “Nothing wrong with that!” you say. True enough, unless you use one data base for both companies. You credit one business and debit the other. At the end of the month, the books balance, but the numbers are meaningless.

As a result, monumental adjustments were required to create good, meaningful data and they were months behind in doing it. The owner, by the way, was a CPA. Before I ever got there, he’d invested close to $1 million in the venture and ended up losing most of it. Go figure.

Remember the business cycle; especially in a highly seasonal business like snowboarding. You have to invest money (for salaries, advertising, inventory, whatever) before you can sell anything. The more you sell, the more money you have to invest to keep the business running. It’s called working capital. Profit is an accounting concept. Nobody ever pays their bills with profit. Companies run on cash. If you grow faster than your financial capabilities allow, you can be profitable, but still broke.

If your business is growing (even if it’s not, but especially if it is), do a simple cash projection. It can be as easy as beginning cash balance, plus sources of cash during the month, less itemized expenses for the month, equal cash balance at the end of the month. That number becomes the starting place for the next month. Make it as simple or as complex as you like; whatever works for you.

You know two things for sure about a cash projection. First, that it’s never right. Hey, it’s a projection! Second, that the more you use it, the more valuable it becomes. It’s your money. You must understand the financial dynamics of your business no matter how much you’d like to leave it to your accountant.

Find some quiet time to evaluate your business with regards to these five issues. Better still, have an objective third party whose business acumen you trust evaluate them with you. However hard it is to correct any deficiencies you discover, it’s easier to do now than after the business is in decline.

·         A viable business

Evaluate your competitive position. Why are customers going to buy your product instead of somebody else’s? If you don’t have a good answer, ask yourself if the risk you’re taking is worth the potential return.

·         Bridge capital

There’s always a shortage of capital, though it’s typically a symptom rather than a cause of the company’s problems. There has to be cash from some source to keep the business going while the problems are fixed.

·         Management

Managing a turnaround requires a different set of skills than managing a healthy company. Often the individuals who were at the helm as the business declined are the wrong ones to rebuilt it, if only because their credibility and confidence is poor.

·         A little time

If creditors have judgments and are attaching bank accounts, the bank has called the loan, and the IRS is padlocking the place for failure to pay withholding taxes, an organized liquidation or bankruptcy filing may be your only choice. Positive changes take time to have an impact. Options decline with circumstances.

·         A plan

You have to convince yourself, your employees, customers, suppliers banker and other stakeholders that you can recover.