Wednesday, November 16, 2005

A Cold Hard Look at a Struggling Business

When I wrote last week about a client’s decision to close down their business, I promised this week to talk about why they found it necessary to do so. I alluded to a problem at the core of every struggling small business.

When I spoke of my clients’ difficulties, I mentioned the constant struggle to make payroll and have enough leftover to pay the owners. You may think the problem I alluded to IS cash flow. But cash flow is only a masking problem. Actually, poor cash flow is more of a symptom of the actual problem. The problem is generally a business model that is not well thought out or well executed.

Before you get hung up on the phrase “business model”, let me tell you what it means in real world small business terms. Your business model is basically what you do and how you get paid to do it. For an example, let’s look at eBay. eBay makes its money by serving as a go between bringing buyers and sellers together. In exchange for providing the meeting ground and facilitating the sale, eBay receives fees. It isn’t a complicated business model at its core, the difficulty is in executing the model in a way that satisfies customers and makes a profit for eBay at the same time. If the customers are unhappy, the model fails. If eBay can’t operate at a profit, the model fails.

The second half of that equation is where my clients ran into problems. They provide a valuable service to a growing market but providing the service carries a high payroll and a high rate of liability and workers comp. insurances. For every dollar in sales, they pay out about 65 cents in payroll and insurance. That leaves 35 cents of every dollar for rent, utilities, telephone, marketing, advertising, etc. Trying to wring out enough money for the owners to get paid a living wage was usually impossible.

They were able to keep their heads firmly buried in the sand for only so long. We sat down one day and had a very in depth conversation about what the business could potentially produce for income for the owners in the short and long term. We weighed all the benefits, the costs, and the risks. The bottom line was that the business could not realistically support the owners in a way that would allow them to support their families in even a modest way.

Normally, this type of a hard look at a business reveals any number of opportunities for improving the business. In this case, it simply was not possible to make the changes necessary to make things work better for all involved. I will give you some insights next week into why it wasn’t possible…

Until next time,

Caroline Jordan
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