Avoiding Business Failure

Steve Martin
©2003 All Rights Reserved

The best time to plan for hard times is when times are good.

Business failures are a fact of life but yours doesn't have to become one of the statistics...if you manage your business well and prepare for, what some people are saying is inevitable, an economic turndown. Here are five smart strategies.

The facts are quite sobering. According to Dun & Bradstreet's data, the number of business failures in the United States rose from 71,931 in 1996 to 83,384 in 1987 (the latest year for which data is available). Failures hadn't been that high since 1993 when the three-year losing streak associated with the 1991 recession finally waned. The 1997 rate is about 30% higher than the decade leading up to the 1991 recession. What will happen in the first decade of 2000?

Strategy #1. Have a plan. What would/could you do if you suddenly lost 10% or even 30% of your business? Knowing the answers to how you would handle your cash flow, inventories, markets, customers, and your people gives you the power of dealing with surprise. While your competition is wondering what's going on, you can be responding proactively to the challenges and opportunities that such market distress causes. Having a customer retention plan on the shelf, for example, can give you a leg up on the competition. They will probably be out their cutting prices and may, in the process, lose sight of what makes good business sense. You cannot make up negative margins by cutting prices even more to save volume. A strategic plan can pay for itself quickly. If you find yourself in a bind, talk to turn-around experts quickly before you get in too deep.

Strategy #2. Be the low-cost producer. When you are the low-cost producer of goods and services, you cannot be easily undercut. Even in tough times, when the selling point has reverted from service to price, you can maintain a margin while others are hemorrhaging red ink. This may not only mean survival but also longer-term prosperity as you have the opportunity to grow by acquiring market share. A cost reduction or profit improvement program pays for itself in good times and is the best insurance you can have in tough times. The efficiency you build in today will serve you well tomorrow.

Strategy #3. Have your financial ducks in a row. You want to have an excellent relationship with your banker. That means having a strong P&L and balance sheet as well as having an ongoing personal relationship with your banker. Don't wait until it's too late to establish that relationship. Bankers are friendlier when you don't need them to survive. It also doesn't hurt to have relationships with leasing companies and other second-tier financial resources that you could tap if traditional banking can't satisfy your needs.

You can help your balance sheet by employing cost reduction strategies such as managing inventory by making it turn, keeping a tight reign on receivables, husbanding cash and other liquid resources, and keeping your debt in line with accepted levels for your business. You and your CFO or controller should watch your ratios on an ongoing basis. Balance sheet management should be part of your strategic and operational plans.

Strategy #4. Be flexible and fast. Be ready to move on opportunities or challenges quickly. Think creatively - outside the box and find the silver lining in any cloud. If you have to make drastic reductions in variable costs, it's better to do them quickly than slowly. You can bleed the cash right out of a company by making your changes too slowly. Be ready to redirect your assets to better products or market segments.

Because you already have a plan and know what to look for in the market place, you won't spend a dollar chasing that penny down the drain as customers dry up or demand different services. Are you ready to provide a low-price no-frills product or service to customers who used to demand bells and whistles instead? Remember your customers may be suffering worse than you are and will be happy to see you if you bring them solutions that will reduce their costs.

Strategy #5. Be a great problem-solver. You may not be able to solve the world's problems or hold off a downturn or competitive shift but you can certainly respond well if you have to. Good strategic plans go a long way to prepare you but no one's crystal ball is perfect. When problems happen, you and your team should be able to address them quickly and efficiently when you have practiced using the creative problem solving process and tools. Start using it now. Don't wait to try to catch up and learn it when the chips are down.

Preparation, it has been said, is nine tenths of success. These five strategies will help you grow and prosper in good times and survive in the most difficult times.

© 2003 Steven C. Martin, Business Solutions - The Positive Way

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