Don't Let Your Business Lose Money for Too Long!

Over the holidays we were asked by an investor to examine a company and determine if it could survive. We reviewed the financial records and met with management. At the end of our review both we and management agreed that we were about a year too late in saving the company! What difference does a year make?

What was different one year ago? The company had a profitable business surrounded by money losing products and high overhead. Action could have been taken to shed the unprofitable business, reduce expenses and grow the profitable sales. Unfortunately, time had run out!

One year ago the company had positive working capital and a good relationship with their vendors. Over the past year they consumed their cash and disappointed their vendors to the point that no one was willing to work with them. The best analogy would be to imagine you are flying an airplane and the engine stops. As the plane plummets toward the earth you don't wait until 1000 feet over the ground to bring it out of a dive! Same thing with a company!

If you find your company in a dive and losing money you should remember two rules:

Rule #1: Don't Lose Money!
Rule #2: See Rule #1!

It is imperative to take corrective action early in the crisis. Most entrepreneurs do not want to take one step backward. Unfortunately, it is sometimes necessary in order to survive a recession.

Forecasting and Your Business

Do you manage your business looking backward or forward? Are you preoccupied with looking at how last month compared with the budget instead of where your business is headed? While examining actual performance against the budget can be a very useful approach to identifying areas of improvement in your organization, it can also take your focus away from planning for your future business needs.

It is important to develop and maintain a running forecast model of your business, one that incorporates trends (in sales, COGS, and overhead) as well as other information (addition of a significant new customer, loss of a substantial current customer, anticipated large changes in raw material prices and/or other expenses, or a new building lease, for example). This will help you estimate your upcoming needs for cash and give you the time to adequately prepare.

You need to have an income statement model which projects sales based on expected items or services sold and the prices received, as well as expected gross and net margins. This should tie to a projected balance sheet and statement of cash flows. You should also consider a running working capital forecast as well as a capital expenditure forecast.

Being able to anticipate future capital needs months in advance can go a long way to improving your company's performance by allowing you the time to seek out the best terms (in cost of capital as well as other terms). Such a forecast will help you establish credibility with prospective lenders and investors as well as provide an easy means of communication with them.