Tag Archives: Growth

Stop the Rhetoric About SmallBiz, Politicians!

We small business owners watched the political conventions over the last month and were listening to what the pols had to say about watching out for our interests. Numerous speakers took the podium to address an economic challenge not seen in this generation. We of the post-Baby Boom era are wondering whether our way of life will bounce back, rather than when. So many people have lost jobs, big companies have lost revenues they had taken years to build, and small business owners have lost both jobs and revenues as well as their livelihoods. We are, to say the least, keenly interested in whether we are being heard by Washington and our state capitals. We are certain that social security and probably Medicare will not be there for us when we reach retirement age. We truly do not care what happens to those programs–tell us what is going to be done to help us with issues we face!

Saying that small business is the backbone of the economy is not enough–both presidential candidates kowtowed to the convention audiences and said what they had to, but it wasn’t convincing. Part of the reason the comments seemed disingenuous is that “small business” is a catch-all phrase that does not distinguish between differing types of enterprises. As  others have pointed out, a restaurant is a very different type of company than a small manufacturing concern.  Dan Danner, the CEO of  the National Federation of Independent Business (NFIB) says, “There is always a tendency for lawmakers to think that small businesses are just smaller versions of General Motors, and they’re not.” Main Street businesses have very different perspectives on policies that are developed by government. Policies  covering health care, trade, taxation, and ecology often reflect the lobbying power of big business over small business. Chris Holman, chair of the National Small Business Association, says that politicians often “go and vote against small business.”

Data from the Small Business Administration shows that small business has been hit harder than big business by our recent recession. One of the statistics–share of nonfarm GDP from private companies–fell from 48+% in 2002 to <44% in 2010. With home building and related trades suffering from the aftermath of the mortgage crisis, there has been a very slow return to stability –let alone growth–in many small business sectors. Uncertainty over potential changes in the tax code and Obamacare has many small business owners anxious as to what to plan for and how to develop strategies  focused on more than just a few months down the road.

Bloomberg Businessweek writer Peter S. Green profiled several small business owners in the September 17-23 issue who spoke to the issues above. Tom Campbell, who owns the Regulator Bookshop in Durham, NC, spoke out against the unfair advantage online retailers like Amazon have due to sales tax exemptions. He’d like to see the exemptions lifted to create a more competitive playing field. The 20 employees under his supervision have concerns about the future of small bookstores who have to compete in an environment where their customers pay an additional 7+% due to the imbalance in tax liability.

Tom Secor, who owns Durable Corp. in Norwalk, OH, feels that the tax system favors larger businesses. Preferential loopholes in the tax code seem to favor those who have the klout to petition government to listen to them, he says. “Big business is getting the better end of this because they have the money to spend.” Secor’s comments are similar to those voiced by Richard Eidlin, director of public policy at the American Sustainable Business Council. Eidlin decries subsidies offered to big business–whether broadband spectrum or ethanol price guarantees. He says, “If there’s going to be corporate welfare, you could throw some of that at the small corporations.”

In summary, small businesses want someone who understands their needs, can develop programs for sectors of the small business economy, and won’t bog them down in paperwork and red tape. While few actually believe that a president can personally be attuned to these issues, we hope against hope that they will make it a part of their platform and governance!

Finances, Debt & Analysis in the Turnaround

A company’s financial picture at any given time is vitally important to all stakeholders, and never more so than during a turnaround. Financial results are the yardstick by which the business is measured. Outside lenders, creditors, and buyers continually desire affirmation that the company is viable and will be able to continue to meet all of its obligations, including non-financial commitments. Additionally, management relies on this financial information to plan the strategies for the turnaround and future business growth.

Most financial information available has historically been of a reporting nature–it reports prior performance by means of accounting information. The assembly of reliable predictive information on a regular basis is an important step toward profitability; reports such as accounts receivable, accounts payable, cash flow projections, vendor analyses, equities, return on cash, and profits from sales must be generated.

The company’s cash position can be summed up as follows: the money in the bank plus anticipated revenues from sales and financing activities minus any expected payments for direct costs, indirect costs, and general and administrative expenses. The accounts payable portion of the cash position measures the company’s ability to pay current vendors and repay creditors for goods and services delivered. The accounts receivable position is a tabulation of expected sales and fees to be received during a given period. The difference between the two types of accounts is a quick, short-term indicator of the current financial condition of the company.

Complete listings of all bills owed and obligations accrued must be made prior to the release of monies from sales and financing activities. These bills are prioritized for payment–especially payroll, taxes, utilities, and subcontract labor. Secondary obligations are suppliers (unless sole sources), interest due lenders, retirement plan funding, leases, and equipment payments. Cash is only to be disbursed according to priority payment schedules; failure to abide by this rule, regardless of circumstances, will cause problems in restoring positive (or enhanced) cash flow and reduce the likelihood of successful implementation of the turnaround plan.

Debt Structure

A business’s debt structure dictates the profit necessary to amortize it. Accumulated debts to suppliers, lenders, and financing sources need to be determined and paid form the gross profit streams. Paying past-due accounts from loans leads to business failures. For this reason, the gross profit must be managed with extreme care. First, management must estimate the amount of money to:

  • repay creditors over a reasonable time (reasonable = 7 years for structured debt, biweekly for contract labor, monthly for suppliers, and quarterly for taxes),
  • pay creditors for the current portion (<45 days), and
  • pay past-due creditors while remaining current to maintain credibility.

Suppliers, 1099s, direct costs, and indirect costs should be paid from operating funds–not loans. General and administrative expenses should be paid from gross profits.

Creditors should be made a part of the turnaround plan. Analyze and prioritize all debts, contact them, and discuss the projected payment plan for the debt owed. Amortization schedules for their accounts need to be explained and agreed to. Input from other creditors can then be used to draft a scheduling document to complement the accounts payable plan. Taken as a whole, the schedule will aid management in disbursing funds.

Management Analysis

Accumulating data can be a time waste if not turned into timely, useful information. As marketing, operational, and financial numbers are compiled, it should form the basis of the management information system. The resulting analysis will test and challenge beliefs about the company’s competitive position. Critical assessment of trends, patterns, and tendencies can generate ideas to further one’s mission, goals, and objectives. 

Analysis and action should commence hand in hand as the return-to-growth process unfolds. Merely stabilizing is not a permanent solution, but rather a step in the process toward profitable growth. As analysis is performed, opportunities are generated by involving key personnel in problem-solving meetings on a regular basis–the team management concept. For example, a change in product quality to match buyer demand–such as reducing product size while adding features–may be an opportunity discussed in problem-solving meetings.

Crafting a Turnaround Plan

The turnaround plan for a company in decline is like a recipe to a cook. The effective restructuring of a business requires the preparation and implementation of a viable plan. The plan must be based information gathered from financial, operating and marketing sources. Good plans must also address cost containment and revenue enhancement, providing the executive team with a step-by-step process for reversing decline and stabilizing the business. It must also lead to orderly growth promoted through a flexible strategic plan.

In turnaround planning, objectives are created that can be accomplished quickly. Therefore, a turnaround plan should be direct, with a limited life not to exceed one year. Teams should initiate tactics (for example, increasing traffic to one’s website) on a weekly basis, then shift to biweekly and monthly to keep pace with the rate of change within the business. When objectives must be accomplished over a longer time span, it is time to prepare a flexible strategic plan.

The Purpose of a Turnaround Plan

The purpose of a turnaround plan is to provide an organizational focus and a timetable for all recovery activities. For example, measurable performance standards must be enforced. Therefore, key personnel should set objectives before the actual plan is drafted to encourage employees to commit to levels of performance that they believe are attainable. The team management approach will generate the ideal environment for enforcing the mandates of the plan, since every key employee will have been involved in its formulation and implementation.

Time and Money

Because turnarounds are time and dollar critical, the team should stick to the originally drafted plan as long as its underlying assumptions remain valid. When the parameters upon which the plan has been based change, it is time to modify all portions of the plan affected. However, the team should not abandon the plan upon first confrontation with undesirable results.

Outside Parties

To satisfy outside parties interested in the cause for company decline and the solutions underway to reverse it, the plan typically contains a brief section describing the background and historical evolution of the company. Additionally, some discussion of prior operating performance and an objective assessment of the current condition can help the team highlight the events that have caused the problems. Management should then state the problems that caused the decline and follow up with the solutions that have been implemented to address it. Sections on the vision and philosophy of the company are unnecessary, though some do outline the thought process that led to current strategies and goals. However, these thoughts may be more appropriate in a flexible strategic plan, since a turnaround plan is action oriented.

Reaching Ground Zero

In environments in which the business has always made money (and may still be making marginal, though unsatisfactory, returns), it may be difficult to deal with declining profitability. Reading financial reports that signal what may be the first downturn the company has suffered is not sufficient preparation for the struggles to come.  Some find it difficult to believe that what they are reading is accurate. The impulse to ignore the signals and hope that the situation improves can be overwhelming. At some point, however, the team must deal with the facts and acknowledge that money is being lost–either as a net loss or as a smaller return–and that radical change is needed.

Being brutally honest and objective about the status of the business is hard. But, if “ground zero” is never reached, recovery cannot begin in earnest.

Turning Around a Company Not in Trouble

Someone once asked John Whitney of Columbia Business School the question, “how do you turn around a company that isn’t in trouble?” John’s reply was classic–

“it is in trouble—it just isn’t in crisis yet. The idea is to avoid a crisis by changing the policies and procedures in the company so it can really compete globally, compete for the long term.”

John went on to say that waiting until a company is in trouble to fix it is management by exception. Over 20 years ago (before globalization and a worldwide economy became the hot topic it is today) Mr. Whitney observed that competition abroad to continuously improve would force companies domestically to keep focused on “management by review.“

Companies that have enjoyed success, however, can be reluctant to undertake change through what is termed an operational turnaround. It can be harder, though, without the threat of imminent insolvency, to change company culture and rituals. This type of management change relies far less on historical financial performance than on looking forward to what might be.

How to Know When You Need It

Sometimes, losing a big customer is the trigger point. But, losing one can be explained away. Losing multiple large customers and key employees should definitely raise your antennae. If you begin to take longer to take products to market and the competition keeps introducing new products faster, these patterns should make you consider getting outside help. Look to your customers and suppliers to provide industry feedback and “intel” on trends and patterns. 

While Others Cut Costs, Innovate

Suppliers know what’s happening and can advise how to improve your product. Eliminate layers in your company. Get back to communication in person. Lost time, will and energy to problem solve creatively is the biggest expense in most businesses. Regain respect for the people doing the work—respect their integrity, intelligence and commitment. Eschew over-control. Break down communication issues between departments. Cross-functional management focuses on running a system, each part dependent on  the other.    

John Whitney said that, when he watched Leonard Bernstein conducting Beethoven’s Ninth Symphony, he realized that Bernstein “did many of the same things a good manager does. There were parts of the score where he was deeply involved, working to make sure he got exactly the sound, the nuance he wanted. And he knew what he wanted. But he also knew when the orchestra had it going right, and he wasn’t afraid to lean back and just let it happen, let the musicians do their jobs and listen to the music all come together.”

How about you–are you willing to take a hard look at your organization and determine to become better, even though you are already good? Ever heard the expression, “good is the enemy of great?” Consider ways that you can improve information flow, creativity, problem solving and other soft skills. In addressing these seemingly minor issues while business is good, you prepare the way for an operational turnaround–innovation as some may call it in today’s vernacular!

 

 

Growth, Decline & Stabilization Via Turnaround

Clearly, many of the signals of company decline are a result of the growth a company may have experienced. When the growth ends and the business enters a period of stability, management may find itself unable to cope with the lack of growth. The team may continue to manage as if the rate of growth will continue in the near future. However, the plans for an expanding business differ markedly from those of a stable or declining one. When plans are not modified to address the new situation, companies often court trouble. A plan that is carved in granite will become part of the problem, rather than part of the solution.

Case Study: Be Tall Houses

be Tall Houses is an example of a company that has internal and external problems. Be Tall was building forty single-family homes in the $100,000-$150,000 price bracket annually. Sales stood at $4.5 million, and the company employed nine employees.  Internally, there were excessive layers of management, excess wages, material waste, cost overruns, employee morale problems, and information flow deficiencies. In short, the company had almost every signal of decline. Externally, new competition had entered the market. Since Be Tall had damaged its relationships with material suppliers, it could not receive the necessary materials to compete.

The company is now undergoing a turnaround. Part of the strategy is to reduce costs and payroll by a minimum of $250,000 per year. There is also a slump in Be Tall’s markets, so revenue has slipped. The internal elements were changed by laying off unnecessary supervisors, reducing wages, adding a profit-sharing plan, settling lawsuits with suppliers and resuming business on account, reducing costs, and adding computerized information systems to prevent selling homes below cost. External elements are being addressed by rebuilding relationships with suppliers and banks. Finally, Be Tall Houses’ image is being restored in the mind of new home buyers. For example:

  • low offers are being refused,
  • real estate agents are advised that the builder is doing fine, 
  • the builder’s presence in the local community has been heightened, and
  • the builder now meets personally with each buyer.

A building company–or any other company–that suffers from problems and decreased volume becomes a part of the industry and/or community “rumor mill.” Stakeholders–anyone who has an economic interest in the business–may begin to discuss the company’s demise before the business feels the impact of declining profitability. Customers may begin to complain about service. Small problems may take on monumental proportions.

Be hesitant to respond to rumors. Telling stakeholders optimistic stories only makes the situation worse when the stories never come true. A company in trouble needs to face its problems and seek advice on how to solve them. By managing the rumormongers part of the solution, rather than part of the problem, the top executive can begin to clear an effective path toward increased profitability.

Stabilization

Once the signals of a declining business are recognized, the hemorrhaging must be stopped. it is imperative that the company determine its future direction immediately. Faced with an enterprise that has suffered deteriorating value, direct and specific actions must be undertaken by the executive team to reverse the downward spiral. Clearly, changes need to be made; the question now becomes: how should this change be implemented?

The Turnaround: Three Methods

The methods employed in a turnaround vary from case to case but can generally be classified as strategic, operational, or financial (or some combination of the three): Strategic is a changing of markets and products. Operational is an emphasis on cost reductions, revenue generation, and asset reduction. Financial is a restructuring of the balance sheet and income statements to generate cash to fund business growth or reorganization.