Are Losses Draining Your Energy and Finances?

Muddy Waters

• Cash is always tight, scrambling to meet payroll and pay suppliers.
• Hard work does not seem to be helping; you’re going nowhere fast.
• Relationships with close family, favorite trade suppliers, and good employees are strained and near the breaking point.
• Company resources are going down the drain and there is no way to plug the flow.
• Every effort to plug the continued losses has failed and it is time to face the reality that your company may not be able to stay in business.

The finality of it all stands in stark contrast to the “better days ahead” optimism that was the coping mechanism for yesterday’s challenges. Realizing that the dream of continuing to operate as an independent company is rapidly slipping away, thoughts turn to shutting the doors, filing for bankruptcy, or selling everything to get out from under.

Time is Not Your Friend; Act Sooner Than Later

It is counter-intuitive, but the great majority of owners who eventually get through the painful process of winding up their company come out the other side healthier, happier, and with renewed vigor. For these individuals, the transition from business ownership while under duress serves as a life changing experience. Frequent remarks are:

• “I should have done this sooner.”
• “I didn’t realize what it would be like to get my life back.”
• “I was sadly misinformed, not realizing that there were more graceful alternatives than filing bankruptcy or walking away.”

No one ever chooses to be in this situation; regardless of whether the underlying cause of business demise was Covid-19, the credit crunch of the Great Recession or the tragedy of the 911 attacks. The universal truth from many cases is that there can be light at the end of the tunnel, and that light is not an oncoming train!

The starting point out from the tunnel of darkness has nothing to do with financial statements or traditional advice from accountants or lawyers. It has to do with self-assessment of your emotional mind-set.

Do any of the following four comments resonate with you?

• “I am done. It is time to get out from under and do what is right for me. I want to take care of my employees and customers. I want creditors to be treated fairly. But it’s time to move on.”
• “I have no time for thoughtful planning; I am too busy chasing money and keeping the wolves at bay.”
• “My lawyer and accountant tell me I am nuts to keep throwing money at it, but I’m not 100% convinced.”
• “I am not giving up, if there is a way to preserve what I have, I will find it. But if it is not realistic, I can be at peace knowing I did everything I could, and I transitioned from ownership in an ethical, legal, and compassionate way.”

When an owner acknowledges to himself/herself that staying in business is no longer an option, there is often a sense of relief in knowing that the focus has shifted from “whether to stay in business” to “what are my options, when do I make the move, and how do I go about this?”

The Survival Clock is Ticking

Once an owner acknowledges the inevitable, “what are my options” should not be the very next question. Think of this as an emergency room scenario. The patient checks in and is in distress. If the distress is acute and death is imminent, extreme immediate measures may be warranted. It’s open heart surgery time. Long term options such as a change of diet and an exercise regimen won’t solve the problem. It may be too late for planned elective surgery as a safer alternative. Time remaining on the proverbial clock defines the universe of options. Does the patient have years? months? weeks? days? hours? I call this the “survival clock” – this drives the subsequent decisions.

The most common answer is “a few months” and, using the medical metaphor, the owner can plan elective surgery to save significant elements of value with a softer landing for shareholders, employees, creditors, and customers. Indicative conditions would include:

• Available credit is maxed out and/or the company’s lender has cut the line of credit to avoid more exposure.
• Accounts receivable collections exceed new billings to customers over an extended time period.
• Suppliers are tightening up their credit terms.
• The company keeps losing more customers than it gains new customers.
• Good employees are leaving or planning to depart.

If more than three of the following six warning signs of extreme danger are present, the survival clock is probably measured in a few weeks, maybe a month or two (but not many months), and rapid progress is advised to avoid a total loss of value and a hard landing for constituents:

1. Bounced checks are becoming normal.
2. The company is unable to pay complete payroll and is only funding net payroll, deferring IRS payroll taxes and other trust deductions in an effort to preserve cash.
3. Utility bills are not paid in full each month and there is an expanding accrual of 30 days or longer on electric, gas, phone, and internet.
4. Premature invoices are issued to create receivables for presentation purposes to lender or other stakeholders.
5. Financial problems are regularly affecting customers and key employees; they are losing patience.
6. Critical suppliers of paper, ink, toner, and maintenance have cut off new orders or have imposed onerous requirements to continue conducting business with the company.

Time to Pull the Plug?

A word of caution about owners doing their own self-assessment of time frame. Owners often misread how much time is left on the survival clock. Just like water going down the drain, the rate of business deterioration goes faster near the end. It appears slow at first, almost imperceptible. Let some time elapse and what happens? At some point, the losses are clearly visible, the water is circling. Finally, the last bit of water disappears in an accelerating spin that cannot be stopped.