Is Your Business In Distress? Save It With These 5 Steps
Even the most successful and established business can find itself in a position of financial distress. This is caused by sudden and significant changes to the business landscape or it may have crept in over time due to a lack of monitoring and controls.
Before you know it you have a runaway train that requires immediate and decisive corrective action. Many business owners find themselves stuck, not knowing where and how to start turning their business around. Some will think that all is solved by increasing sales. Although this may help, it only masks the real problems that are causing the distress.
There is a process for a business turnaround.
Follow these five steps to get your business back on track:
“Right Size” your business
Every industry as a metric for Annual Sales per Employee. Divide the total number of full time employees (FTE) into your total annual sales. Be sure to include part time positions. eg. A 20 hour per week position should count as a one half position. Compare this ratio to your industry average and be prepared to cut your workforce to meet this metric. Many small business owners consider laying off employees to be a sign of failure. Quite the contrary, it’s an unfortunate but sound business move. Sometimes a number of positions need to be sacrificed to save the majority.
Evaluate Inventory Turns
Again, every industry as a metric for inventory turns. Divide your average inventory into annual sales to calculate your inventory turns. If your turns are significantly lower than your industry average you may have too much money tied up in inventory. Work on strategies to reduce your inventory levels to put your company in line with industry averages.
Compare your Gross Margins to your industry average
If your margins are unacceptably low take steps to improve them immediately. Causes of low margins can include low productivity, high material costs or too many people as described in “Step 1”.
Review all line items under your Operating Expenses and look for ways to decrease the cost of each line by 10%
There is often low hanging fruit when you look close enough. Start with the highest cost items first as this will provide the biggest overall impact.
Take a close look at your Accounts Receivable
You can’t pay bills if your money is in your customer’s bank account instead of yours. Be sure your Average A/R days are in line with your credit terms.If not in line with your credit terms work on strategies to collect money quicker.
The urgency of your situation will determine the level of speed and intensity of your strategies. Many business owners wait too long to act leaving little to no hope for a successful turnaround. The key is to start the process immediately, be decisive and bring in outside help if necessary.
Tony Malyk, Vancouver Business Performance Coach