Understanding more about the financial performance
of your company will help you see trends as they are developing and not wait
until a crisis. Some problems are acute—they happen suddenly—and some are
chronic—they go on for years, and you learn to live with them. Here are seven
situations that should put up red flags.
1. Little or No Revenue Growth.
Early-stage companies normally experience substantial growth as customers find
you and your market enthusiastically. Then there is a leveling-off period when
growth seems to slow and then stop. It may work to spend a short period at that
plateau while you allow your business systems to grow to handle the volume. But
then you must look at ways to get back on the growth path.
The reasons not to do so are
understandable. You may be working 50 - 60 hours a week just to handle what you
have and there is little time to find new clients, even if you thought you
could handle their business. However, growth is a necessity—because even with a
reasonable level of inflation, flat revenues sincerely means a loss of revenues
in terms of much needed dollars.
And, as you know, the costs
to operate your business never go down. Rent, utilities, phone, and even
postage is always going up. Wages also ... including your own. As your
employees become more experienced, you will want to pay them commensurate with
their contributions, so raises are understandable, in benefits as well as
salary. You may have increased insurance and added vacation time. All of this has
a cost. And you need to replace and update equipment as well.
So what effect does flat
growth have with this scenario? It lowers your profit. Costs become a greater
percentage of revenue and ultimately profits become smaller. It may begin to
create a serious cash squeeze and imperil your ability to pay debts and keep up
with needed equipment purchases or repair.
2. Deteriorating Capital Base
Periods of flat growth in revenue can cause a negative cash flow. You need a
steady stream of profit to allow cash to pay principal debt service and allow
for reinvestment in brand new technology, equipment, or unknown project
development.
After a fairly short time,
you will find yourself in a double bind. You aren't generating enough cash to
fund any meaningful growth, and this lack of profits may prevent you from
borrowing to fund it as well.
If you have gotten to this
point, chances are your alternatives are few. One may be to look to outside
investors for funds, although this is typically difficult for construction
companies since the risk is known to be far too great, and you may have to give
up a good bit of control to get the capital you need. The other possibility is
to sell off assets to raise cash. This may be a dangerous strategy, without
considerable thought. You don't want to sell something you will need later.
Selling jobs to cheap or at a loss will
affect profits as well as solvency.
3. Equipment
Failures That Threaten Productivity
Not having positive cash
flow will not just jeopardize growth; it will also affect current operations.
If your equipment is not operating properly, your production may be slower, or
quality not what you need or expect. In addition, total breakdowns will stop
production and cause employees to stand around not accomplishing any work. This
will raise your direct costs and lower profits even further.
4. Poor Employee Morale
Look around at your employees and give close consideration to what you see. Are
they angry, disillusioned, or confused? Are they short of materials, tools,
jobs, or ... working on substandard equipment, or always fending off
threatening phone calls by disgruntled customers? Are you communicating with
them?
Surely you know that having
good employees is a contributing factor in the growth and success of your
venture. So it makes sense that when (and if) they feel negative, this will
have the opposite effect. The most immediate result will be diminished
productivity. People who don't care, show it. They take more time off and
seldom think of ways to accomplish the task at hand quicker or efficiently. If
wages are frozen or bonuses missed, the attitude becomes "What's the
use?" And your job becomes tougher because the need to communicate becomes
more urgent.
And remember as well, your
employees are often the public face of your company. If they have gripes,
that's where they may air them. I still remember traveling on Delta Airlines in
the midst of its most difficult times. All you heard from employees were
complaints and dissatisfaction. It made the trip uncomfortable and forced me, a
fairly frequent flyer, to look at other airlines. I wasn't the only one, and
the loss of business further hurt the weakened airline.
There are not merely
business reasons to care about the concerns of workers. There are human reasons
as well, and you want to keep a sense of community in your company.
5. Unpaid Taxes
No business owner sets out to get into trouble with the tax collector. Most of
us have enough sense to know how painful that can be. However, it may start
accidentally and grow quickly. It often starts with a single payroll when the
money isn't fully available. Paychecks are issued with the expectation that
withheld taxes will be covered as soon as customers begin to pay outstanding
invoices. Even so, by the time these payments are received, other bills have to
be paid or another payroll is coming up. Before you know it, taxes are owed and
the money just isn't there. Now you are in dangerous territory.
First of all, many taxing
bodies have the power to collect that exceeds those of ordinary creditors. They
can make a demand for payment, file a lien, and execute a levy on your bank or
even your customers in record time. They are effective collectors.
Second, the financial burden
grows very quickly, particularly if unpaid returns are not filed. For federal
taxes, there are penalties both for failure to file and for failure to pay—5%
per month. So, in the end, you won't just be paying the tax, you will be paying
back the tax plus penalty and interest.
Another consideration is the
possibility of personal liability. If you are the responsible officer, that is,
the one who makes the financial decisions, an assessment can be made against
you as well as your company. Then the collection actions will be aimed at your
assets.
And if all this weren't
enough to motivate, there is also the matter of criminal prosecution. It is
unlikely for payroll taxes, but it is far more frequent for not remitting sales
tax. That is often charged as theft, as the money belongs to the state, not
your company. If your business has found itself in this kind of trouble, see a
professional as soon as you can. This is one problem you can't ignore!
6. Failure or Closing of a Major Customer
Most new businesses are
warned about becoming dependent on a single customer or even a few. That is
easy in theory, but often difficult in practice. When a customer offers you a
lot of business, it isn't easy to turn it down. If you are in an industry where
there are only a few players of any size, this may be your reality.
If it is and one of these
major customers cut back operations, files for reorganization, or closes, your
entire business may be jeopardized. So pay attention to what is happening
within the industry as well as with your customers.
If payments get slower, take
some action. If the company is big enough, the accounting side does not talk to
the purchasing side, so you won't lose the business. Anyway, if you're not
going to get paid, you don't want the sale. I had a client who was a small
electrical contractor who allowed a major Fortune 100 companies to get so far
behind that my client had to file bankruptcy. Minimize your exposure.
If orders slow down, don’t
wait until they stop: Get out and look for new business. At the same time, keep
your lines of communication up with your customer. These are the times when you
have to work hard just to stay even.
7. New Technology
Creating Pricing Pressure
The landscape of America is full of rusted plants, some of which are still
partially in operation. It's impossible to believe that they could be
efficient. Jobs that were done by workers are now being done by robots.
Planning production is done by computer. Inventory and shipping are managed by
scanners. The years bring new technology: If older companies cannot afford to
keep up, they are likely unable to compete.
Labor-intensive businesses
must be able to avail themselves of labor-saving devices. Pricing pressures
come from those domestic companies that can afford to do so in addition to the
offshore operations that use low-cost labor. Staying in business without currently,
a profit makes little sense.
These are not the only
serious problems a company can run into. I could write a book about the perils
of the construction companies, their overuse of running their business by the
seat of their pants and under use of business models. Regardless of how new an
idea is and how clever the folks that thought it up; business was now and will
always be about revenue exceeding costs and creating profit. This is not a
theory; it is a reality, and you must have a stream of income.
The latest and greatest idea
may come and go, but at the end of the day, it's hard work and good dealings
that secure the future for most businesses.
