Surviving Hard Times: Critical Steps for Small Businesses
September 2011
Keeping your business profitable during hard times can be difficult at best. When your business suffers continuing losses, the situation can become overwhelming. This article is intended to review a few basic steps that a small business owner may take before determining whether a business experiencing continuing losses can be turned around or, alternatively, if it is time to stop digging the hole deeper. However, if you are looking for a magic wand, it's not here. This article simply reviews time-tested procedures that are worth considering.
First, make certain that you have an accurate working knowledge of your monthly income and expenses. If you aren't already using a software program such as QuickBooks, you should consider doing so. Everything starts with accurate information. A hand-written ledger will work just fine; it is the accuracy of your numbers that is key.
Second, consider ways to increase your income. Feel free to think outside of the box. Look at each existing revenue stream and consider potential ways to increase income - without any increase in expenses. You also should consider whether there is a potential to add new revenue streams, again, without increasing costs. Another consideration might be whether you can utilize existing business assets more efficiently. Because this part of the analysis is so fact-dependent for every individual business, increasing revenue is not discussed in any detail here.
Third, you should conduct a detailed examination of your expenses. More specifically, look for ways to decrease expenses. If your business has experienced losses for any sustained period of time, you probably think you have already performed this step. However, I'm suggesting a more detailed analysis than you are likely to have performed: Create a detailed spreadsheet that lists every individual expense for each month by category. If you enter business data into a software program such as QuickBooks, creating your spreadsheet is as easy as pushing a "create report" button. If not, you can create the same spreadsheet by hand. The critical thing is to list each expense individually and by category.
Each month, list and review every individual expense and ask this question: "Can I eliminate this expense without decreasing my income?" It is the rare small business that has not accumulated unnecessary or outdated repetitive expenses. This is even more so for individually owned or family-held businesses. If you can't identify potential expenses to cut yourself, consider having a professional, such as your CPA, review your expenses and suggest cuts.
Be ruthless in eliminating expenses. You are dealing with the survival of your business. Keep in mind that if you can't reduce expenses to below the level of your income, your business will not survive. When you can eliminate an expense without a corresponding reduction in income, you should do so. Be mindful that the easiest way to increase income is to reduce an expense. Repeat this exercise each month with only one goal in mind - the survival of your business.
Do use common sense. There are many expenses that don't correlate directly to income that should not be eliminated. Insurance is but one example.
Lastly, there are certain actions you should avoid altogether. For example, do not fail to timely file and pay your payroll taxes. Taking a short term "loan" from Uncle Sam is never a good idea and can create a tax liability that grows far more quickly that you might imagine when you add in penalties and interest. If you can't afford to pay payroll taxes, it's time to seek professional advice and consider closing your doors or, at the very least, eliminating employees.
As another example of things not to do, it is almost always a bad idea to borrow or withdraw money from a retirement plan to attempt to save a troubled business. Under most conditions, you will owe income taxes on the withdrawal (or on the loan you fail to repay), and you may owe a penalty as well. Further, your retirement account is one of the few substantial assets you may have that is exempt from the claims of creditors (other than the IRS). If you are considering a withdrawal from your retirement account to bail out your business, it's time to consult a professional.
Operating a small business is difficult enough without the strain of dealing with continuing losses. In the face of losses, however, a fresh perspective may provide insights you haven't considered. Turning to a CPA or financial advisor for assistance, before things get too far out of hand, may help you find ways to avoid continuing losses - or decide if it's time to quit digging the hole deeper.
Donald H. Grim's practice focuses on tax determination, tax collection controversies, bankruptcy and estate planning. He can be reached at donald.grim@greenemarkley.com or (503) 295-2668.
This article appeared in the September 2011 issue of the Coast River Business Journal.
