5 Steps to Eliminate Financial Stress in Your Business

Liquidity Problems and Insolvency:

Don’t kid yourself or others, every business (today) – from multi-national Conglomerates to the smallest Proprietorships is getting squeezed, financially.

The only difference between success, mediocrity or failure is how these businesses are choosing to address these difficulties. Are they being proactive by getting ahead of their problems or reactive, choosing instead not to deal with their problems until they become insurmountable?

Setting aside those factors that occur that a business has no control over, why do some businesses succeed while others fail? Often, it’s bad decisions.

And why do bad decisions occur? Often, they’re based on bad/obsolete or stale data.

The suggestions and ideas presented here are targeted to Small Business Owners/Partners and Shareholders that are looking to identify financial stress, quantify the severity of the stress and how to eliminate the stress.

If you have a small business, I don’t need to remind you of the financial headwinds and pressures you’re facing.

Inflationary pressures are pushing your costs higher. Money is getting tighter, because your Clients and Customers are tightening their wallets and this is impacting demand and sales for your products and services.

Rising costs and falling sales cut into your profit margins and your ability to sustain your business at a level of quality or (quantity) that your Clients or Customers consider acceptable.

This is a topic that most Businesses, Owners, Partners and Shareholders don’t want to admit or even talk about – Financial stress (or distress). Specifically, the inability of their business to pay their short term obligations (Liquidity problems) or their long-term obligations (Insolvency).

The Personal Toll: 

Financial stress also takes a personal toll on you and your family – your business is generating less and that means less pay (for you). But, mortgage costs, rent, insurance, food, clothing and (other) everyday necessities are continuing to increase.

Don’t believe me? Look around. Main street small businesses are getting hammered. Business closures are everywhere, so getting and (ensuring) your financial “ship” is in order is no longer a luxury, it’s a necessity.

Financial stress/distress – it may not be a pleasant topic, but you can’t wish it away, hoping it gets better. You’re kicking a tin can down the road, avoiding the inevitable. If you don’t address and attack this particular issue, it will literally attack you. You could lose your business and more than just that – your livelihood and the kind of freedom you enjoy from having your own business.

Does Your Business Have Problems?  

For this page – there are two distinct “camps” of small businesses right now – 1. Those that refuse to acknowledge they have a problem, and 2. Those that think or know they have a problem, but don’t know what to do or where to start.

If you’re in camp 1, what’s your plan? What are your financials telling you? Are your financials (Profit & Loss/Balance Sheet/Key Performance Indicators) current, or do you (normally) disregard your financials and continue to take whatever you need to pay yourself to sustain your livelihood? This is not a recipe for disaster, it’s just plain disastrous.

You may remember a popular TV show – The Profit. The star of that show was Marcus Lemonis – an extremely successful serial entrepreneur. He was an investor of (oftentimes) distressed small businesses that had showed success but fell into “disrepair” through neglect, poor decisions or circumstances beyond their control. He would often say, “If you don’t know your numbers, you don’t know your business.” Absolutely, positively, 100% true.

If you’re in camp 1, and refuse to take any proactive steps toward getting your financials updated and accurate, and then basing business decisions on stale/unadjusted data, I wish you luck – I really do. I’m not advocating for your failure, but in this environment, you’re increasing the odds of failure by not taking a (more) proactive approach toward managing your business.

This page is targeted toward those in camp 2.

Enough of the scare tactics, let’s talk solutions.

5 Steps To Identify and Eliminate Financial Stress:

Ok Professor, what’s the fix?

1. Start by getting your accounts/books/records reconciled, updated and adjusted for Asset and Liability balances. It’s not sexy, it’s not rocket science and it takes work, but it’s necessary. Apps, Artificial Intelligence or other Tech Tools are just that, TOOLS. The crazy hype that you can simply push a couple of buttons and fix/rectify months or years of unadjusted/unreconciled accounts/books is not just hype, it’s misleading (I’m being charitable here). Running a successful business is not about luck, it’s about being disciplined.
2. Have an experienced Accountant develop some Key Performance Indicators (KPI’s) targeting two broad categories – Performance and Efficiency. How has your business performed Month over Month (MOM) or Year over Year (YOY) toward generating Gross Profit, for example. Gross Profit is the difference between your Net Sales and Cost of Sales. Why is measuring Gross Profit important? Because Gross Profit pays for everything else in your business after deducting your Cost of Sales. Also, create a cash break-even point, that is, the amount of cash your business needs to create to cover the following – your operating expenses, your monthly obligations – short and long-term, your rent or mortgage payments (see #3, below) and your pay through distributions/draws or as a W2 employee.
3. Develop a measure of financial stress by considering these accounts/categories – cash balances, sales, short term and long-term obligation payments, and another important factor – Mortgage or rent. Why include mortgage or rent? Because landlords or banks (like creditors) can force your storefront/location or business to close. You need to identify trends that point to a consistent deterioration in your sales and cash balances that jeopardize paying your obligations and the inability to generate enough cash to cover your break-even point (#2, above). Use historical data to develop a forecast template. Quantify (on a scale from 1-10, 10 being the worst) the amount of financial stress in your business. However you choose to quantify the level of stress, keep a consistent method so you can compare this measure, month over month.
4. For stress levels higher then 7, you must act to reduce the amount of cash outflow that you have control over – namely, expenses that are more discretionary in nature. In other words, those (operating) expenses that are required to deliver products and services take priority over those that do not. If your business is seasonal, pay particular attention to those months with slow or slowing sales.
5. Track your business stress levels as part of your Key Performance Indicator (KPI) Dashboard over time, in addition to other efficiency and performance measures. Monitor for trends that point to a deterioration in cash liquidity and then, act.

An Example to Eliminate Financial Stress: 

If, for example, your cash balances (and sales) have been decreasing over the past several months and you have significant short term obligations (obligations due within the current operating period/calendar year) along with a mortgage payment on your storefront, this means that you should be taking an aggressive approach toward reducing your expenses by a more than proportionate amount than the decrease in sales, to conserve cash. What is a more than proportionate amount? I would start by eliminating those expenses and outlays considered discretionary to create a cash cushion of at least 25-30%, (every month) using a cash break-even point – developed in #2, above.

I would not use percentages. For example, if your sales decreased 2.5% (month over month), but your (total) cash outlay decreased 4%, that may or may not be enough, because sales are often larger than total payments and expenses. Use absolute dollar figures.

You may be thinking, I’ll just get a revolving credit line and use that for cash shortfalls. You could. But interest rates have pushed revolving credit lines beyond the reach for even the best credit-worthy Clients. That, coupled with aggressive payment terms is making debt and the amount of collateral to secure that debt both expensive and risky.

About Budgets to Constrain Spending – Smart and Tactical:

Budgets can be useful. As long as they are enforced throughout the organization.

You may be using budgeting on a month to month or quarterly basis, but unless you’re adjusting for inflation (through a dynamic/rolling budget for both sales and costs/expenses), I wouldn’t put much faith in it. I would not place much value on static budgets in an environment where inflation is rising more than 2-3 percent per year.

Accrual Based Businesses:

Accrual basis businesses are more complex because you need to adjust for the timing of cash receipts and payments that occur later in the cycle.

Accruals for sales and expenses mean little here, because you need to focus on cash.

Closing and Contact Info:

Business owner’s do not enjoy talking about problems facing their business – they may feel embarrassed or it may bruise their ego. But the fact is, businesses are often, complex. So, during periods of robust economic growth, underlying structural problems often get “papered over,” because strong activity hides problems. When things get tough, these problems are exposed and become magnified.

Then to, not all problems that indicate a deteriorating financial condition have their roots in or can be (permanently) solved by only cutting expenses that are not a priority – business failures from key customers or supply chain issues are two that come to mind. These types of problems have time horizons (for solutions) that extend well into the future. However, in the near term, shrinking business activity demands that cuts be made. And to, making smart, targeted cuts, at the appropriate time, can minimize the impact to a business that needs to right-size it’s operation.

The point is this: Every business has problems, and no business owner should be made to feel inadequate because they may not know exactly what to do when confronted with financial problems. Take the emotion out of it, identify the drivers and root cause(s) of these problems and develop immediate and longer-range plans to match those immediate problems and those structural problems requiring a longer time horizon.

I’ve offered some ideas and suggestions here, not a recipe. But if you take anything from this page (and you do nothing else), focus on getting your accounts/books/records updated to ensure that you can rely on your business data to make solid decisions.

I’m not trying to sell you on anything. I’m advocating for your success by telling you to seek good, professional help to both sustain and thrive is this difficult environment.

If you’re interested in learning more about my approach toward identifying factors that may lead to distress in your business before your business crosses the point of no return, Contact Us.