What to Do When the Signs Look Bleak in your Startup

You are already analyzing your numbers on a regular basis—running cost-benefit analyses regularly and analyzing your expenditures on a return-on-investment (ROI) basis.

But what do you do when the signs aren’t looking so hot? When your expendi­tures are greater than your income? You need to immediately look for ways to
cut back if you don’t believe the situation will turn around fast. Bring your team together if you have one, and ask for new ideas to bring in new revenue (and reward them if they pan out and are followed through on). If you have an open line of credit or can get one before even one bill is late (you do not want to dam­age your business or personal credit), and you know your business will be okay in the next 30 to 60 days, consider using the line and riding out the low tide.

But if you believe the short rainfall could be a drought, it is time to take action immediately. Cut all expenditures that aren’t necessary. Hopefully you have already been calling companies you do business with regularly (including utility companies) to be sure you are on the best rate plans, but if you haven’t, do so right away. Call all clients with balances beyond their due date, and cut back on staff hours if you need to. You may need to take on more of the burden yourself for a while, until the business is doing better again.

This is really time to reassess whether your projections are accurate and if so, by just how much. If they aren’t, you need to adjust them, and fast. Figure out if you’re on a path to destruction or if this is a temporary glitch by examining why business isn’t doing as great. The key is to act quickly, but don’t overreact if it’s a temporary problem. You may also wish to spend money, as counterintuitive as that is, on advertising, marketing, and public relations to draw in more business. Spend money where it makes the most sense and draws in the greatest number of potential customers.

1. Warning Signs of Financial Insecurity

What are some warning signs of impending doom and the need for quick change? Running a monthly deficit is a big one. Barely meeting payroll each month is another one. Paying employees a day or two late is a red flag. Not being able to pay yourself your full salary that month is another big one. Rapidly declining sales or other competitors and new entrants into the marketplace may threaten your business’s security and stability. Not being able to fund a great opportunity when it comes along, or consistently paying bills barely within the grace period, are other bad signs. Needing to put your personal money into your business account to keep your accounts in check is another, as is the cost of your services not keeping up with inflation, or people being unwilling to pay the same as they were in the past for your services. Lack of response to a good marketing campaign may also require attention, as it may mean you need to find another niche.

2. Raising Capital Quickly

Venture capitalists and even banks aren’t necessarily going to be fast in getting money pumped into your business. Often the fastest way to do this is to raise your price (if it won’t affect your client base negatively), downsize or rightsize (which is similar, but it is designed with a specific approach to be sure the com­pany needs exactly the staff they have), and raise capital through quick-to-get high interest credit cards. While these can be dangerous in the long term, they can get you through a hard time fast.

Another method which could be a fairly quick means of raising funds is to set up an initial public offering or IPO. With an IPO, you are selling shares, or interest, of your company. This won’t happen until you have enough cash flow that you can show value for stock holders.

If your business is growing quickly and you have a lot of interest in your company, you could sell and issue stock to those wishing to “get in on the deal.” For instance, some of the most common purchasers of stock through an IPO are employees and initial investors. Creating and selling stock is fairly simple and straightforward if you have already structured your business as a corporation, because in doing so, you established a certain number of shares when you incor­porated with the state.

Keep in mind, however, that in going about raising capital this way, you now have shareholders, meaning that you will have to take their votes and opinions into account when operating your business. Your board will have say over the direction of your business. As soon as you sell a single share of your company, you are obligated to turn a profit. This is referred to as fiduciary responsibility.

It is your responsibility to ensure that you operate your business in a manner that turns a profit, increasing the value of the shares that you have sold and issued.

There are many other obligations tied to issuing stock. I suggest you research this method deeply and consult with both legal and financial counsel before moving forward with this option.

Lastly, you can always form a strategic partnership with another business, whether a competitor or a complementary business. If you are the one who will benefit most from the partnership, you will most likely end up receiving the short end of the stick with regard to overall benefits of the partnership, but if it keeps your business alive or growing, it may be your only choice. An example of a strategic partnership would be if See’s Candies partnered with FTD. The joint marketing potential would be that if you purchased a box of candy, you would get a discount on a dozen roses, or vice versa.

3. Throwing Good Money After Bad

I have personally seen so many business owners throw good money after bad that it is nauseating. If you know something isn’t working, don’t continue to do it!

Taking that phone book ad resulting in one call every quarter with someone just checking on price (and more calls soliciting business than buy­ing anything) and then renewing the contract is an example of throwing good money after bad. Keeping that super-fast Internet connection when the fast one sufficed just fine (or you couldn’t even tell the difference) is another.

4. Knowing When to Change Direction

One of the most difficult things for any business owner to do is to change course, and to do it quickly before the situation becomes critical or results in late pay­ments to anyone, including yourself. When you need to change direction, it may be time for you to step away from your business for a few days, and even take a few trusted colleagues with you to strategize. Be candid with employees about what is going on and that you’re figuring out what the cause is. Ask them, too.

Many times, they’re working with the customer and you aren’t—they may know something they are too afraid to tell you. This is another reason why you need to keep the lines of communication open. Don’t wait until a crisis to communicate.

Your course shift may be dramatic and drastic, like an entirely new line of business, or it may be more subtle, like a small website change that will, for instance, accept Discover in addition to MasterCard and Visa. It may be as simple as advertising more, or as serious as a lack of demand for your product or service that will continue into the foreseeable future. I highly recommend you write down expansion ideas and new business ideas as you come up with them throughout your years as a business owner, and now is the time to crack open that book.

Should you need to downsize or rightsize, chances are whatever you choose will be difficult because your team may feel like family. This is often the case with small businesses or individuals you have mentored, especially if you have done so on a personal level. I can say that in all my years as a senior leader in Corporate America and a business owner, the hardest decisions I have had to make were along these lines. The key is to be candid, open, and honest. The following is an example of what not to do, a real story that occurred within an organization I worked for, IPC Communications in California (headquartered in Michigan).

Our plant focused primarily on fulfillment and CD/DVD replication, while the headquarters in Michigan was mostly a print house. The print consumers wanted DVDs and CDs, which created the need for our division. Many of these were customers like Apple and Microsoft and were located in California, which I understand is the reason our division was located on the left coast. From my first day, I could feel the tensions between the two locations and between the staff members. Rather than bringing the teams together, senior leaders in Michigan stuck up for only their people in Michigan. As our division’s profits tanked due to corporate’s pricing strategy and lack of leadership, rather than bringing in support from Michigan, they had a plan to shut down our facility. We all felt it; it was “in the air,” so to speak. But no one discussed it except those in our own plant.

We had very tight security; we replicated CDs for big companies that had a high degree of theft for product serial codes, and so on. We had a huge warehouse with stored product that we “kitted” and assembled for big companies like Toshiba.

Every day we went through airportlike security—including going to lunch. One day, while walking into the building (note we had no prior warning at all), we noticed there were seven guards instead of the usual one or two. Next to the guards and lining the hallways were boxes! You do the math—if you worked there, what would you do? As senior leaders, we were all instructed by the presi­dent, who visited a couple of times a year at most, to organize our teams into conference rooms at specific times—those who would keep their jobs for 30 days in one room, 60 days in another, those asked to help shut down the plant and incentivized with bonuses in yet another. Everyone knew what was going on, and the management from Michigan still waited until the end of the day. People sat in rooms waiting for the axe to fall, trying to figure out why they were separated, realizing it was by time left with the company—just not knowing how much time.

The job market wasn’t so great for IT workers, which was the group I led. I did my best to persuade the president to keep my staff on as long as possible, but they fired the people who ran the customer-facing software first (and subsequently had to rehire them back with contracts at five to six times their salary when sys­tems didn’t work and they had no choice but to pay up or be nonoperational). As leaders, we were required to help people pack their things and make sure nothing disappeared out of the warehouse on their way out. Some people were walking around hallways crying and hugging; even HR was devastated. Others were just ticked. We all went our separate ways; many went to my next organization when I was able to hire back a lot of my previous staff. My direct boss at the time hired most of the rest of the team at his company, so most fared okay. But morale? And trust in Corporate America? They suffered forever. In fact, most of us became entrepreneurs within 10 years, and we will never fire ourselves in the manner we were treated—without dignity or trust.

Source: Babb Danielle (2009), The Accidental Startup: How to Realize Your True Potential by Becoming Your Own Boss. Alpha.

2 thoughts on “What to Do When the Signs Look Bleak in your Startup

  1. Cecil Rublee says:

    It?¦s in point of fact a nice and helpful piece of info. I am glad that you just shared this useful info with us. Please stay us informed like this. Thank you for sharing.

Leave a Reply

Your email address will not be published.