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Warning signs that your business is failing.

Are these just tough times or is it time to bail out? B. E. tells when to close your doors instead of sinking money into a drowning business.

PENNY MCCONNELL, FORMER OWNER of Penny's Pastries, in Austin, Texas, just knew she was headed for business success when she landed a $500,000 account with Southwest Airlines to produce a line of packaged cookies. McConnell, who sold decorative cookies whole sale to bakeries, gift shops, hotels and caterers, watched her sales soar: from $160,000 in 1994 to $400,000 the next year. The high did not last long, however. Penny's Pastries began to crumble when it failed to keep up with Southwest Airline's production demands.

It's a story repeated all too often. A small business owner seizes upon an opportunity for business growth and moves into areas where they have limited or no experience. Such was the case for McConnell. Penny's Pastries went from supplying fresh cookies by the dozen to producing five million units, thus requiring a new formula, packaging, equipment, a bigger plant and more employees. Despite blatant warnings that it was time to jump off the burning ship, McConnell held steadfast at the helm. But despite her courageous efforts, the company sank. A year later, she finally had to file for bankruptcy.

According to the Small Business Administration, roughly half of all start-ups go out of business within four years, mainly due to inadequate planning, undercapitalization, poor cash-flow management and indebtedness. Although many of these firms could not have been saved, some could have reversed course or bailed out with smaller losses if they had recognized and responded to early warning signs.

For business owners who claim they don't know where to look, start with your company's balance sheet and income statement. While the number of failing U.S. businesses--those that have closed or filed for bankruptcy--declined by less than 0.5% last year to about 71,194, according to Dun & Bradstreet, the liabilities of those businesses increased by 29%. This is a good indicator that these firms were overextended in debt, with little cash on hand. Liabilities of the failed businesses totaled $37.5 billion, compared with $29 billion for the 71,558 failures in 1994.

"Many black businesses fail because they are more undercapitalized than other businesses," says Harold "Hal" Brown, associate dean and director for community economic development at San Diego State University College of Business Administration. They also run aground, he continues, because their owners "fail to do the necessary market research to justify the need for services and products. They think they have a good idea or product, but they don't form a committee of experts to advise them along the way."

H. Irving Grousbeck, a consulting professor of management at Stanford University Business School, explains it another way: "Blaming lack of capital for business failure is like saying a lot of people die of old age, when in most cases, people die of some disease."

Grousbeck, co-founder of Continen-tal Cablevision, the third largest cable company in the U.S., uses the analogy of making an omelet and then realizing you have no milk. The key to avoiding business failure, he stresses, is to start asking yourself before you go into business, What are the two or three critical skills and level of experience I need in order for my business to succeed? At the same time, as a business owner you must be prepared to deal with such key functional areas as marketing, planning, sales, finance and manufacturing.

Still, there's no one definitive reason why some businesses thrive while others take a nosedive.

If your company has significant cash on hand, shows a profit, makes current payments and has repeat business then you should be experiencing smooth sailing. On the other hand, the following warning signs will help you keep your business from capsizing if it begins heading into turbulent waters.

* Cash flow problems. Be leery if you're so thinly capitalized that just meeting day-to-day bills becomes a chore, warns CPA Michael D. Evans, president of Evans Financial Consultants Inc. and an assistant professor at Winthrop University Business School. "When your company is financing with debt as opposed to equity, your business is headed for trouble. And if it takes you a long time to collect debts from customers, and if your expenses are increasing while your sales are decreasing, your company is at risk," he adds.

Unfortunately, most business owners don't realize how much money it takes to run a business, just as many businesspeople fall into the trap of anticipating their customers and suppliers paying early. In actuality, however, receivables may take 60 days to come in while you've already had to pay for supplies and payroll.

Understand what it takes to get a revolving line of credit before you start your business. It's always easier to get money when you don't need it, so don't wait until you're desperate. Develop your business plan using conservative projections and don't be overly optimistic.

It's not impossible for a profitable, fast-growing business to run out of cash and be forced into bankruptcy because it couldn't finance inventory and receivables or manage credit. That's why ongoing cash-flow analysis-tracking the money coming in and going out of the business--is a must.

* Growing too quickly. Every business owner wants to grow his or her business, but expanding with no infrastructure in place makes a business ripe for failure. Jacalyn S. Goforth, a partner with the Entrepreneurial Advisory Services Group in Coopers & Lybrand's Detroit office, says she has seen time and time again companies that open additional locations without adequate management in place to run those sites. For instance, a retail store owner may open two or three outlets, but fail to provide customer training for the additional help. The upshot is poor customer service and dwindling sales.

You can incur tremendous losses when you expand outside your core market. Not only is the physical aspect of expansion costly but there are different buying habits in different geographical locations. If you venture into an area outside your home turf, you had better prepare by doing a lot of research.

* Losing focus. Business owners often fail when they lose focus. They stray away from their core product or service or become too dependent on ancillary products. If your business is selling office supplies, don't emphasize selling housewares. Your customers patronize your business because of your primary product.

Sixteen years ago, Jim T. Jones started a Sizzler franchise in Los Angeles, raking in $150,000 a month in sales. By the early '90s, the business was foundering. As customer traffic declined, Jones fell behind on his land lease payment, taxes and other fees. He took out two loans, totaling $400,000, to fulfill his increasing financial obligations. Clearly, Jones was overburdened with debt.

In 1995, he added a sports lounge where he sold alcohol, but this was anathema to Sizzler's family reputation. A mutual agreement was worked out with the chain, in which they exempted Jones from the remaining loan balance and allowed him to change the restaurant's name to Mr. J's. The determined Jones felt the sports lounge would guarantee traffic, but when Monday night football ended, people stopped coming in to dine.

The 70-year-old Jones' voice trembles as he recalls his failed strategy. "The restaurant was rapidly declining in sales and I thought by putting in a new bar and changing the name, I could increase sales." Instead, Jones lost 70% of his customers, most of whom were church parishioners. He saw his sales nosedive to $75,000 a month.

* Loss of customers. Pay heed to increased customer complaints and decreased customer traffic. Disgruntled, fleeing customers could be costing your company thousands of dollars in lost revenues every year. Management experts agree that the costs of keeping a customer is a lot cheaper than the cost of getting a new one. Chasing a hot trend as opposed to listening to your customers is a mistake businesses make all too often. Maybe what you really need is better customer service and marketing, or perhaps a more skilled sales force.

* Not knowing your limitations. Most business owners assume they know their limitations. They either fail to recognize their deficiencies or choose to ignore them. Thinking you have more talents than you actually possess, and not hiring the right people to shore up the areas where you are weak, will send any business spiraling down. Don't be embarrassed to admit that "these are the things I'm not good at." Just surround yourself with qualified people.

In the case of Penny's Pastries, the distribution company received pallets or crates of cookies, but instead of inventorying them, they were moved directly to Southwest Airlines. A manufacturer normally ships to a distributor who stockpiles a percentage of the goods before shipping. This didn't happen with Penny's Pastries. Instead, production was boosted from 60 to 90 pallets a month. Beset by equipment breakdowns, high overhead, a poorly trained staff and a waste level of 7% (in an industry that averages 3%), it soon became obvious that Penny's Pastries was headed for failure.

Four months into production, McConnell hired a manufacturing consultant. His purpose was to turn around production flow, giving McConnell more control over labor and inventory and better relations with distributors. Then the bomb dropped: There were some glaring errors in the company's financial projections, which were based on selling one cookie per package versus the two the company was packaging and shipping. McConnell severed ties with Southwest Airlines--but it was too late. Penny's Pastries was moving headlong into bankruptcy.

REESTABLISH YOURSELF

Even if your business folds, you can still bounce back. Grousbeck advises business owners to work for someone else for a while, stressing the value of learning how to be a good administrator. "Try to run the operation, and in two to three years start your business again. If you try to restart your business right away, you may have trouble attracting investors. Investors will logically ask what is different now from when you failed."

Brown counsels business owners to seriously examine the reasons for failure and to seek help from industry experts in the analysis. Perhaps you needed to build up your skills, made faulty judgments or failed to execute your business plan.

When all is said and done, as the business owner you are responsible for any failures. As long as you're committed to staying in business you will face challenges. McConnell likens her experience to "reading a road map which you think is heading you toward Atlanta, but which is really taking you straight to New York." But you don't have to be misguided. If you create a company blueprint and stick to it, you can achieve long-term business success.

RELATED ARTICLE: BUSINESS FAILURES BY LIABILITY SIZE

For the past four years, businesses have witnessed a downward trend in dollar liabilities. The trend was reversed, however, in the latter part of 1995. What happened? There were more business failures. By year-end, the liability size had increased a sizable 29%. Roughly half of the businesses that failed in 1995 had liabilities between $25,000 and $1 million. On the other hand, businesses with liabilities over $1 million have witnessed a slight decline.

The South Atlantic (Maryland, Georgia, District of Columbia, Florida, South Carolina, North Carolina) and New England (Massachusetts, Connecticut, Rhode Island) regions received the hardest blows, with liabilities soaring 135% and 46%, respectively. This increase came as a surprise, given the fact that the South Atlantic states experienced an 8% decrease in the number of business failures and New England posted the highest decline at 10%.

While 1995 failure trends were fairly consistent with 1994, the increase in dollar liabilities bears scrutiny.

[TABULAR DATA OMITTED]

RELATED ARTICLE: 12 RED FLAGS of POTENTIAL BUSINESS BUST

Having witnessed entrepreneurs in various stages of distress, Coopers & Lybrand's Jacalyn Goforth offers 12 "red flags" of potential business failure

1. Are you having difficulty meeting your bills? 2. Are you experiencing a shrinking market for your product? 3. Are you frequently losing customer sales? 4. Is there an increase in customer complaints, revealing that your business is failing to meet their needs? 5. Do you find that inventory levels are climbing faster than sales, and you are building up more inventory than sales warrant? 6. Is your company highly leveraged and thinly capitalized? Does your bank have more at stake in your business than you do? 7. Do you have essentially a one-person management team? Ask yourself, is my company overdependent upon any one person? 8. Is your business suffering from poor management communications? Are decisions not being disseminated down from the top? 9. Are you working with poor management tools (that is, are you getting inadequate information on sales levels, growth in accounts receivables, inventory levels, etc.)? 10. Is your company very late in producing financial statements? This is a sure sign of poor financial planning. 11. Are you experiencing sales growth but no growth in net income? 12. Do you have a tight grip on expenditures, or is your company committing to expenditures before cash is in hand?
COPYRIGHT 1996 Earl G. Graves Publishing Co., Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1996, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Title Annotation:B.E. Special Report on Small Business; includes the 12 red flags of potential business failure
Author:Shakespeare, Tonia
Publication:Black Enterprise
Article Type:Cover Story
Date:Nov 1, 1996
Words:2189
Previous Article:A call to arms for Black business.
Next Article:Doing business the paperless way.
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