11 Dec 2013
- Written by Carlee McCullough
The fact that businesses come and go is no surprise to anyone. Taking the current economy into consideration, many businesses are suffering. As business owners, we are trained to hang in there and ride out the storm. We are taught to sacrifice and put everything into the business.
To an owner, the business is like a child that was birthed. A failing business is a painful thing to endure because it is no longer fun. Both the owner and employees dread coming to work.
Win by any means necessary is the motto for many owners. Unfortunately, the conversation involving when to shut the business down is all too rare. Few want to admit failure or defeat. They do not even want to think about closing down.
However, in some situations the business needs to either wind down and close or reorganize. Let's look at a few signs that a business is suffering.
The most ideal situation is to have from 6 to 12 months of operating capital in the bank. Although this may not be the current position of most small businesses, it is imperative to know the standard to achieve.
Inability to pay rent or mortgage
A result of being undercapitalized is the inability to remain current on the rent or mortgage. This can of course be remedied, but it requires cooperation and communication with the landlord or management company to negotiate late payments. If the landlord or management company is not willing to work with the business, looking for an alternative location may need to be considered.
Inability to pay salaries
Another result of under capitalization is the inability to pay the employees in full and on time. In such instances, the business owner may need to consider downsizing through layoffs. Although never a pleasant option, it may be the wisest.
Over time, entrepreneurs often become personally attached to employees and procrastinate in making the decisions to downsize. Remember honesty is the best policy. Employees may eventually grow to respect the decisions that had to be made in the best interests of the business.
Lack of sales
Sales are the backbone of all businesses. Anytime sales are lackluster, business starts to suffer. When the product is not moving, it is time to evaluate why. Is there someone in the marketplace with a better, cheaper, faster, tastier product or service? Determine if adjustments need to be made to what you are offering the market.
A thriving business can be driven under by slow- or non-paying clients. After service or a product has been delivered to a client and the terms of payment have been established, it is only right that the business owner expect prompt payment. When prompt payment does not occur, the result is a business that is unable to pay its own bills on time. It may be time to demand payment when services are rendered rather than extending credit.
The dreaded lawsuit for nonpayment is another sign of under-capitalization. While typically a lawsuit for nonpayment can be seen coming, it is rarely desired. When the bills are not paid on time lawsuits can ensue and drive the struggling business even deeper into trouble.
Personal guarantee on loans
Most entrepreneurs establish a business as a corporation, s-corporation or limited liability company for the purpose of separating their personal assets and liabilities from the business assets and liabilities. When the business enters into the danger zone and needs an infusion of capital, the entrepreneur will frequently personally guarantee loans for the business.
It is easy and convenient for an owner to simply use a personal credit card in times of need for the business. However, the use of personal credit cards or loans to cover operating costs points to signs of trouble. By the time the entrepreneur obtains loans for the business, the business may be beyond saving and the effect of a personal guarantee now puts personal assets at risk.
Prior to placing personal assets in jeopardy, evaluate the continued viability of a business. Reaching out for help and advice is also priority.
Although few entrepreneurs want to admit failure, getting out at the right time can leave the owner fiscally sound to start a new business venture. Wait too long to end it and not only will the business ultimately close anyway, but the owner may be affected personally by the use of personal credit cards and guarantees of loans.