Triage

May 2, 2018

 

Q. I’ve got a terrible problem. My business with 25 employees is underwater. I can’t pay all of the bills. We have plenty of revenue, but things have gotten away from me. I’m overwhelmed and don’t know what to do next. What’s your advice?

 

A. It sounds like you are in a tough spot. You’ll likely have to make some difficult decisions and will need to take decisive action to save your business. We’ll give you some general thoughts on how to address your most pressing needs. However, you may be well advised to reach out to someone with experience in this area for help.

 

  • Ensure that you have a positive variable contribution – That is, make sure that the price you receive for your product or service exceeds what it costs you to deliver an incremental unit (e.g., make one more widget or perform one more hour of service). Do this for every product, if you have multiple products. If you price customers differently, the analysis must be done at the customer level. When you find situations with a negative variable contribution, increase price, reduce the cost of providing the incremental unit, or stop offering that product or service. There may be rare exceptions to this rule, but in general, you have got to ensure that you are contributing something to cover your overhead on each sale.

 

  • Cut costs – To stay in business, you will likely have to reduce your costs. First, eliminate all discretionary spending. The summer outing or the company holiday party needs to go. Next, look to non-people costs. Can you reduce what you pay in travel costs or utilities? The landlord may be willing to reduce rent, at least for a time, if the alternative is empty space because you are out of business. Unfortunately, cutting costs may well involve the difficult decision to reduce labor costs (i.e., lay off people, reduce their hours or reduce compensation). Austerity measures are never easy, but if the alternative is closing your business, it will be better to keep some people employed than for everyone to lose their jobs when the company shuts the doors.

 

  • Prioritize your payables – You owe more than your available cash. Therefore, you must prioritize what to pay. We suggest prioritizing in the following order:

 

    • First, pay obligations that will shut your business down if you don’t pay them. For example, if you don’t pay your employees, they will likely leave to find work with employers who can pay them. If this leaves you unable to deliver your product or service, you’ll be out of business. Paying employees is typically a top priority. Suppliers who can shut your business down if they stop providing you with things you need to sell your product or perform your service are also high on the list of bills that need to get paid.

 

    • Prioritize items that will result in large penalties next. For example, not paying taxes in a timely manner can sometimes result in massive fines. Avoid these if possible.

 

    • Any payment that is late should be next in line.

 

    • Finally, prioritize payments that are not yet late last.

 

Remember, a partial payment is better than no payment. You may want to pay multiple creditors part of what you owe rather than paying one in full.

 

  • Plan your cash flow carefully – Once you have prioritized your payables, assess the cash you have and the receivables you expect to collect. Then build a detailed cash flow plan that lays out who you will pay, when you will pay them and how much you will pay them.

 

  • Communicate with creditors – When you owe money you can’t pay in a timely manner, it is easy to ignore the situation and hide. This is almost always a mistake. Call your creditors. Explain your situation and your plans to pay your debt. Most people will be willing to work with you if they believe that you will eventually pay what you owe. 

 

If you have bank debt and will break a covenant either because you will miss a payment or because some other requirement will not be met (e.g., liquidity requirements), proactively communicate with your banker regarding your situation. Remember, your banker is primarily interested in being repaid. The bank will likely only call your loan if it assesses that there is little hope of being repaid otherwise. If you proactively go to your banker with a sound plan to improve your financial situation and repay the loan, he/she is highly likely to work with you.

 

The five tips above will help you effectively triage your priorities when your business is struggling. However, don’t wait until it is too late to take action. Move quickly to get your business back on the right track.

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