Are You Under Business Financial Stress? Tips on getting to the real problems—not just the symptoms!Chia-Li Chien, Ph.D., CFP®, PMP®, CPBC
Chia-Li Chien | Aug. 26, 2013
Although everyone is enjoying some relief from the Great Recession, competition is fiercer than ever out there. You may have also noticed higher interest rates, stricter loan requirements and terms, and choosier venture capitalists adding to the business stress you fight everyday.
In a 2009 You’re the Boss Blog post written by Jay Goltz in The New York Times, Goltz remarks, “The interesting thing about entrepreneurship is that you can encounter stress either because you are busy and growing and making money—or because you are not.”
He goes on in the blog to offer 6 tips for dealing with business financial stress:
- Identify the real problem. I agree. For the past few months, I’ve noticed many business owners seeking me out for advice because their business is in financial crisis and they are stressed out and/or burned out. I often counsel owners or entrepreneurs to locate the root cause of their financial stress—not to focus only on the symptoms. The symptoms often are described as: negative profits, negative cash flow, an open business line of credit with the owner’s primary resident as collateral, getting more loan money from the bank or seeking equity ownership in exchange for cash to deal with debt or capital expansion. The list goes on and on.
- Separate the fear from the anxiety. Goltz defines fear as rational and anxiety as worry caused by irrational thoughts. I work out nearly every morning and belong to a weekend hiking club. Why? I too am a business owner, and in order to work out my anxiety, face, and focus on what’s real, and get rid of what’s the worry, I’ve come to find physical exercise the perfect cure. Find something that works for you.
- Forgive yourself. Goltz points out that we all make mistakes—in business, in love, in life. Don’t look back, ask forgiveness if needed, forgive yourself and everyone else, and move on. Repeat as necessary.
- Keep your perspective. I have read many books by successful people on what makes a business successful. I’ve written a couple of business books myself. You have to expect problems along the way. Deal with it and yes, you guessed it, move on, then repeat as necessary.
- Accept responsibility when you should. If you find yourself under financial stress, understand and embrace that it’s your responsibility, take action, and then re-visit Goltz’s tip #3.
- Think positively. End the stinking thinking. You know all the whys—and you know it’s not easy. However, your personal—and business health—may depend on it.
With Goltz’s tips in mind, let’s examine some of the results of my Business Value Drivers survey over the past few years (see my book, Work Toward Reward, for details). As I gathered the data, it appeared the root cause of financial stress fell into three major categories that impact the value of a business— the business must 1) increase Recast EBITDA; 2) Reduce Risk; and/or 3) Employ high-yield capital.
Let’s look closer at the first root cause (notice I did not say symptom) of financial stress—the need to Increase Recast EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization; an accounting term used commonly in business performance review, valuation or transactions).
The value drivers to Increase Recast EBITDA include 1) increasing sales 2) Lowering cost of goods sold and 3) Controlling operating expenses. All of these steps in addressing this root cause of financial stress deserve a closer look—because they are extremely important to the health of your business value.
- INCREASE SALES
I always encourage owners to think outside their current offering. For example, Jane (not her real name) has been in a niche industry as an educational services provider (not her real industry) for more than ten years and has one product with close to 1,000 customers. Revenue rebounded after the financial crisis in 2008 and reached the $5MM mark. Although Jane was showing a small positive net profit, the cash flow was still extremely tight and there was no cash reserve in place to expand into more territories.
Seeing her potential for customer growth, Jane received a call from a major competitor. The competitor offered to buy her business. If Jane moved forward with the buyout, their product would dominate the market. However, the buyout term was simply to pay off Jane’s overall debt. Was that a strong enough offer? There would be no financial reward or gain to show for more than ten years of hard work. What would you do?
Although Jane has not moved forward with this competitor’s offer at this time, she did have other financial stress-reducing options worth considering:
• Stay focused on niche markets and go deep into one vertical then horizontal. Seek out alliance partnerships to expand her market.
• Diversify products by re-packaging or bundle different products. One general product is too high of a risk. This requires innovation from her team. When in stress, innovation is hard due to the team’s focus on survival. For more information on innovation, please read my previous article titled Innovate and Re-Package Your Products and Services.
Consolidating competitors is one strategy to increase sales, but it comes with a price. According to Middle Market M & A: Handbook for Investment Banking and Business Consulting by Kenneth H. Marks, statistics show that poor integration resulting from post M&A transaction may not yield anticipated growth or ROI.
- LOWER COST OF GOODS SOLD
Your business model should have three general components: 1) business purpose 2) core competencies and 3) profit formula.
Core competences include key resources and key processes. Ideally, invest in your core competencies and outsource the non-core competencies, then you can greatly lower the cost of goods and boost your net profit. For more information on this, please read my previous article titled Should You Outsource Certain Services?
For years, companies have approached Jane with the idea of taking over some of her departmental functions. She has always been concerned about the quality of the work and communication issues. The reality is that unless Jane looks into the ROI of her team she will not know if it is smart to outsource these functions or not.
As technology advances are introduced faster and faster, the cost of keeping Jane’s team up to date becomes quite expensive. More and more Fortune 500 companies are outsourcing many of their functions. The bottom line objective is to lower the cost of goods sold and boost net profit. (Although the complexity of outsourcing is not a subject in this article, it is something worth looking into.)
- CONTROL OPERATING EXPENSES
Jane actually operated at 70% of her overall capability. That meant 30% of her workforce was being wasted, and she continued to pay for this in overhead. This led to unfavorable net profits and tight cash flow. Of course, at the end of the day, I like to revisit every client’s business model, which takes time to adjust and diligence to implement.
Controlling your operating expenses by taking a new look at your business model may mean eliminating under-used capacity, equipment or human capital. It could also mean trimming unnecessary office space that has been empty for over three years. (Many of my clients sublet their empty space out to subsidize their operating expense. This is something obvious and easy to do for most owners.)
I can you help carefully plan and execute the value drivers to Increase Recast EBITDA to increase your business value and reduce your financial stress over the long run. Focus on reaching your business goals under less stress. You deserve it!