If your business is in a crisis, here is how you can stabilize your situation and reduce the burden, so you can make good decisions.
Here are 6 Steps you can follow to stabilize your business:
- Step 1: Making sure that everybody fully understands the situation
- Step 2: Create and then maintain a positive cash balance at all times.
- Step 3: Find out what caused the problems you are dealing with.
- Step 4: Prepare a realistic turnaround plan your creditors will support.
- Step 5: Negotiate the restructuring of your debts.
- Step 6: Execute with precision and consistency.
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Step 1: Make sure everybody understands the situation
Bring together all employees and clearly define the problem, making sure that everybody fully understands the situation. Employees, managers, suppliers, banks, investors, unions and anyone else who may influence your business should be involved, to some degree, in formulating the turnaround strategy. The involvement of all stakeholders in planning and implementing the strategy will generally increase their level of commitment to your business turnaround.
Explain the severity of the situation, emphasizing that without their commitment and loyalty the business can fail. Employees need to ‘come to the party’ and be involved in the rebuilding of the business. When a company is in crisis mode, management and staff need to be in harmony and instep with the need of the company.
Step 2: Create and maintain a positive cash balance at all times.
The key to stabilizing your business is to immediately create and then maintain a positive cash balance at all times. The quickest way to do this is to never spend more this week than you had at the end of the last week, regardless of how much you plan to collect this week. This simple cash control budget works like a live support; it keeps you alive while you determine what went wrong and what to do about it.
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Step 3: Find out what caused the problems you are dealing with.
There could be a number of reasons why your business is in trouble, but generally one of the following is the culprit:
- Sales are down, lost to new competitors or a decline in market demand caused by an economic downturn.
- Profit margins have declined while fixed costs remained the same.
- Fixed costs have increased while profit margins remained the same.
You can quickly isolate the causes through look at your numbers and performance for the past three years. Review your industry and what's going on with your competitors. If others are doing well and you are not. Your goal is to close the gaps.
The results of this analysis will help you determine what caused your cash crisis and what you must do to fix it. Remember, the lack of cash is an effect, not a cause. As you move on the next step, you will begin eliminating the causes.
Step 4: Prepare a realistic turnaround plan your creditors will support.
Write a simple turnaround plan to get through the next year and convince your creditors to stick with you. Be clear and state your objectives in measurable terms. Describe your core business, sales plan, staff reductions and cost saving actions. You should include a cash budget and a set of monthly financial projections.
Be brutally honest in your assessment of how you got into this situation and how you intend to get out of it. This will help restore your credibility. You will need this to obtain concessions from your creditors.
The objective in writing a turnaround plan is to prove that you can stay in business while you turn things around. Creditors generally assume if you can't write it down, so they can understand it, you can't expect them to believe it. Frankly, that's fair. So, take your time and do it right.
Step 5: Negotiate the restructuring of your debts.
Negotiate the restructuring of your debts and obligations to the level your cash flow will support - nothing more. Sort your creditors into two groups: Group A and Group B. Group
Group A creditors - are those you need to do business with in the future, like banks and critical suppliers.
Group B creditors - are those you can replace and don't need to survive. Usually, Group B creditors create the most noise.
Because you've done your homework and are operating with positive cash flow, you are now in a position to negotiate. Meet personally with each Group A creditor and sell them on your turnaround plan. Be factual and positive. Show them how they will be repaid from the cash that flows from your reorganized company. My experience is that most Group A creditors will go along with you.
Caution: Creditors often try to strengthen their position and compromise your long-term viability for the sake of recovering their money more quickly than your cash flow allows.
Politely tell them, "No." Remind creditors that it is only the cash flow from your reorganized business that can repay them.
Don't waste time with Group B creditors. Hire a debt negotiator to obtain a settlement for you and move on. These specialists are a unique group, and frankly some are better than others.
Step 6: Execute with precision and consistency.
I've seen many business owners get past the immediate cash crisis and calm their creditors down, only to fail to execute their turnaround plans. They stop focusing on cash flow, lose their discipline of daily measurement, and turn instinctively back to sales (where the fun is).
The result is a predictable slide back to negative cash flow, missed payments…and the wheels come off the wagon. The owner loses all credibility and there is no recovery. To avoid this, stick to your map and do all the tasks called for in your turnaround plan. Insist on personal and staff accountability. Success is won or lost through execution. Here are som great tools that will help you to execute your plan.
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