What do I do when my business is down?

Remember what we said in the beginning of this article series? Look under category Start-up: “Think about your business to last for the long run.”

We all wish that our sales curves would be that ideal straight line going steadily upwards. year after year. And your profits along with that line.  Since, when you start your business, being a pottery, a teaching ceramic studio, a porcelain dollmaking studio, a studio for china painting, a ceramic teacher or any other niche in the big and multifaceted ceramic arts market, the curve of the first years is likely to have that nice up-ward slope. But, over a longer time, you may run into slowing growth, no growth, or a declining curve. What to do?

Let’s first look at the overall business climate, like this present year 2011. It’s easy to blame the overall business conditions for your stagnating or declining sales. But blaming something does not solve any problems.

When you drew up your first business plan you looked three years forward. Now it’s the fourth year, say, and things do not look so good. In fact, common sense tells you that the present stagnation or decline needs to be addressed. You have to do something to increase sales. Or, find another way to increase profits. Without profits, your business is doomed.

First, let’s define the true reasons for decline

Over time, the business environment changes. It could have to do with macro-economic downturns with most business sectors down - in the US and other developed countries. It could have to do with political winds blowing in the wrong direction. It could have to do with disruption of your business over which you have no influence such as a sudden sickness or any number of other reasons beyond your control. The truth is, though - it does not matter what the reason is, what matters is how you steer your business back to profitability. As the old saying goes – “what matters it not being knocked down – it is getting back on your feet.”

First step to a come-back – the analysis

When your profits are down it is easy for you to get down on yourself. Just forget that. Just accept that as a fact and focus on finding an arsenal of actions to fight back.

Take time out to calmly review the situation. Bring your financial records, including your initial plan, with you home and take time off for quiet analysis, undisturbed.  If you have good friends in the same market you are, contact them and be up front about your challenge. They might be, or might have been, in the same situation and, then, supporting each other, ideas for action might crop up.

Whatever the case, withdraw to a quiet corner with a writing pad and your pen and calmly write down your situation. Writing things down helps your thought process.

1. Compare your sales/profit development with your plan and try to locate the true point where your results started to slide. What caused it? Shrinking sales?  Too high expenses, such as payroll? Too big overhead, such as rent? Too little cash caused by too high inventory or other investments?

2. Time management. Have you spent too much of your time operating your business?  Being an entrepreneur and the sole owner of your business, you are on your own, literally. You may be the sole one responsible for the day-to-day management. It’s easy to spend all of your time operating the business and too little or no time controlling it, analyzing it and thinking things through. Youare the business; the engine that drives it, steers it.

Letting the analytical part of your business behind can happen easily. Just accept that and take corrective action, such as deciding to spend X amount of time on analyzing the business, from now on.

3. What triggered your problem? Most of the time, the trigger is the so called the “cash bullet”. Too little money to operate the proper way.

4. At this point, it is time to consult with your carefully selected accountant. Ask for a quick interim report. It will cost you some money, but you would get it back in very short order. Allow time for yourself to estimate as closely as possible the value of your inventory. You have not sufficient time for a thorough physical inventory, like the one you take at the end of your fiscal year, so an estimate will do for now. The accountant will need it to produce a report as close to reality as possible.

Tell your accountant about the estimated inventory and give him/her all the data needed for a good reading of your financial situation, including your credit card debt.  This debt is short-term but nevertheless debt. Hold nothing back. Leave your pride at home and accept critique and sound, third party analysis and advice.

5. There can come a time to borrow money, but be careful. What did you have in mind when you made your business plan? To self-finance? What, of substance, has happened that would make you change your plan? You might already have some loan from starting the business. Is there a believable reason to add to your debt?

Your accountant may come to the conclusion that you need more financing or a restructuring of your business. He might point out that in many cases, the “cash bullet” stems from under-capitalization from the beginning or caused by the rapid growth of your business. Nevertheless, the advice you get is the same – choose from the two alternatives above or a combination of the two.

Now, armed with the analytical part for the correction process, let’s take a look at the underlying reasons and how to deal with them.

Turning your business around

The challenge of getting your sales in line with your plan will take longer than the analysis above. Add to that the obvious actions needed to take, such as trimming down your inventory to free up cash. You may have to decide on a correction of your marketing structure and, once convinced that you are on the right track, install the changes and then be patient as you wait to see the results.

The annoying part of this process is that you, almost always, blame yourself for not realizing earlier, much earlier, what you now plan to switch to. Well, there is nothing you can do about that after the fact, so just accept that it happened and get around to action.

In big business, when you submit a plan, you also submit a so called “sensitivity analysis”. Very simply, you work with the top lines – sales and gross profit (gross profit means the difference between your sales and your cost of the goods sold) – and work out “what if” scenarios. What if my sales fall 10% short of my real ones? What happens if my gross profit falls short of what I have planned?  Do I still make a net profit?  This exercise alerts you to take action earlier, when you detect that the trend points to a “what if” situation. So you will be looking for it as a matter of routine. You can then – in the planning stage – prepare scenarios with how to deal with these “what ifs”.  If you have not done it before, promise yourself to do it when making plans for the future.

I recommend that you check your “what ifs” at your quarterly review.

Things to accept and things to change

The contracted lease for your space is considered a fixed cost by your accountant. But yor never have to accept that. Over time, nothing is fixed, everything can be changed.

Even your rent. Talk to your landlord and try to work out a reduction for the next two years. If your relationship is fine, the landlord would perhaps rather take a lower rent than trying to find another reliable tenant. Ask the landlord if there is anything you can do to lower the rent. Negotiate.

The same applies to your payroll – it can be lowered. Same approach with the costs for what you buy. Negotiate with your suppliers. Turn every stone and consider nothing cast in cement. Over time, as said, everything can be adjusted.

However – the most effective change you can make – the one major change that can turn your business around in the most dramatic way, is your marketing.

Marketing actions towards a long term solution

Now, after having analyzed the assets (inventory and equipment), and your expenses (rent, payroll), you can embark on finding a long-term, satisfactory solution – or solutions. There are many of them and you start with the one marketing step you think will yield the biggest return.

This phase is a real workout for your brain. Write down your thoughts, your suggestions, your doubts and how you intend to find your answers. I refer to the four articles on marketing in this series. Find them under the category Marketing. Each point below represents one of the four parts described in the chapters of marketing.

1.   Analyze your products (Part one).  Are they satisfying the needs of your target clientele? What should you do if your conclusion is that some of them do not? What changes do you see as necessary for a turn-around?

2. Review all aspects of your pricing (Part two). If your gross profit (= profit after deducting the cost of goods from your sales) is slipping, maybe right there is the key to solving that challenge, namely raising your prices. This is time consuming and requires some research as to your sourcing of the products you sell or make, as well as determining which customers are sensitive to price increases – the groups you classify as to their price elasticity. Say farewell to personal angst when decision time comes to adjust your prices. Let your logic be the master and trust your findings. Increasing prices is part of being in business.

3. Find answers to the questions: Who is my customer, where are my customers and how do I reach them? (Part 3). Map out the profiles of your customer groups and where they live. You may find areas where a marketing effort will pay off handsomely. And you may see groups of customer types that are right there under your nose, but not an existing target of your present calls to action.

4. Finally, follow the Blueprint for Marketing Success (Part 4). This forces you to find the answers from your two main sources – your external source (sales statistics – by product and customer), and your internal sources, polling your customers to find out what they want from you. It’s interesting what a direct question to your existing customers can reveal.

Effort and time frame

All of the above requires a complete dedication from your side – you must have fire in your belly to go through this.  It’s worth it though – after all, you are finding your keys to future prosperity.

You may ask – “what is the time frame and how can I afford to spend the time for all this?”  The answer is straightforward. To do what is outlined above will take time and will cost money. It’s a good idea to always have some cushion of cash around for this rainy day. Think in terms of keeping the equivalent in cash to your outlays for running your business for 4-6 weeks without income. This would make it easier and more appetizing to tackle all this.

Well, even though the research may take a few months, the end result is well worth sacrificing any available cash your may have  – or part of it. The time to accumulate this cushion of cash was before you started your business; to correctly capitalize your start up. It’s too late to do anything about this now. We will deal with these financing issues in another chapter. However, as you now develop your second plan, do it right and figure in the need to accumulate cash for the next time when the need arises.

Summary of actions to take

 

  1. Retrieve your original business plan, analyze your present situation and find the “tipping point” – when your business was hit by the “cash bullet”.
  2. Define what, in your mind, is the true reason for the problem.
  3. Write down these reasons.
  4. Define what triggered your problem.
  5. Decide to turn your business around.
  6. Accept the time that this process will take.
  7. Analyze your products, your pricing and your customers.
  8. Search your records for sales and profits by product and customer type. Ask your customers for their input regarding your business.
  9. Accept that this process will take not only time but also cost some money.
  10. Muster the courage to implement necessary changes

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© 2011 by Rolf E. Ericson, Oneonta, New York, publisher. All rights reserved. Photocopying, reproduction , copying, or redistribution of any kind in printed or electronic form is strictly prohibited without written permission from the publisher.