Yes, the economy hit businesses hard and the recovery isn't what many hoped for, but the fact remains the economy is getting better. So if your business hasn't started picking up, maybe it's time to stop blaming the recession and take a long, hard look at your operations.
Too often businesses blame the economy for their problems rather than looking at their internal problems, says Leo Glasheen, a counselor with the Lakes Region Chapter of SCORE, a nationwide nonprofit group that connects entrepreneurs to experienced former and current business owners and executives who volunteer as business advisors. Glasheen and Roger Laux, also a counselor with the Lakes Region Chapter of SCORE, say the three biggest stumbling blocks for businesses are cash flow, festering personnel problems, and lack of attention to detail.
When you run a business you have to wear many different hats, says W. Stephen Loughlin, a senior vice president in the commercial lending department of Bank of NH, who has worked in the commercial lending field for 40 years. And it's usually the hat that you're the least comfortable wearing that gets you in trouble. In his experience, Loughlin says, business failures are most frequently caused by undercapitalization and poor management. Either there is not enough non-borrowed money to operate the business, or there is a reluctance or inability by the owner to recognize and/or address those issues. He says it's important to know where your strengths and weaknesses lie and to seek expert help in those areas where you need it.
Get Your Financial House in Order
Some businesses run aground because the owner has difficulty understanding the financial condition of his or her business. It is critical to have a thorough understanding of the balance sheet, which is a snapshot of the business's financial condition. Also look closely at the income statement, which includes revenues, expenses and whether or not the business is making a profit. You've got to keep track of the financials daily, or at least quarterly, says Loughlin.
When businesses find themselves in a bind, they often focus more on controlling their expenses. But scrutinizing expenses is just as important in the good times as the rough times. When business is improving, we see a lot of companies that lose focus on their expenses, says Rudy Bazelmans, a regional director for Expense Reduction Analysts in Manchester. They assume that if things are getting better, the pressure is off. The result is that profits erode. The trick, of course, is to watch both sides of the coin-revenue and expenses.
Bazelmans says the importance of staying on top of the financial status of the company cannot be overstated. One might assume that problem is limited to small businesses. But Bazelmans says that's not true. He is aware of firms with $7 million or $8 million in annual sales that did not have a good handle on what their numbers meant.
One sure way to keep your financial house in order is to have a thorough and regularly updated business plan. The business plan should describe the nature of the business, what the business needs to do to be successful, and how the business will implement those key items. Part of this plan is a marketing plan that addresses the five Ps: Product, price, place, people and promotion. The marketing plan should also explain how the business plans to address competition, Glasheen says.
Entrepreneurs seeking advice on finances and business plans can turn to a variety of sources. Beyond SCORE, help is also available from the NH Small Business Administration (www.sba.gov), the NH Small Business Development Center (www.nhsbdc.org) and the NH Department of Resources and Economic Development (www.nheconomy.com) whose Business Resource Center coordinates free assistance opportunities and services for small- and medium-sized businesses.
Clearly Define Partnerships
Another area where businesses run into trouble is when the responsibilities of business partners are poorly defined. Partners and principals need to take the time spell out in writing exactly how the various business decisions will be made and how ownership and finances are distributed and managed.
Determine who has the authority to do what, or under precisely what conditions do all or a majority of the partners have to agree on a major business decision, such as buying equipment, launching a new venture or hiring employees.
Sometimes one partner turns out to be unpredictable and if there is no clear agreement of what happens if they disagree, then under New Hampshire law they fall back under the default rules in which all the partners are considered co-owners and one partner can be held liable for the business decisions of another partner, says Ruth-Ellen Post, a Salem attorney who specializes in business law.
There is no set of best practices for resolving disagreements, says Patrick Wood, a Laconia attorney, as it depends on the business type. But Post says some key things need to be spelled out including:
The amount each partner is investing in the business;
Whether the partners consider their stake in the venture to be an outright investment or a loan;
and how the partners plan to pay themselves.
Are they paying themselves what amounts to a dividend, or are they paying themselves a salary? Either option has a host of implications, including tax implications, Post says. Both Post and Wood say some agreements can call for the principals to use mediation or arbitration to resolve thorny issues-whether a professional mediator or someone from a relevant trade association. Or maybe if there is a disagreement over the financials, the partners agree to abide by the accountant's figures. If it's a family business, it's important to have a document that details how the business will be run if and when it passes to the next generation.
Pay Attention to the Details
The Devil is indeed in the details. Too often businesses put themselves at a disadvantage because they don't focus enough on fine print, whether it's a lease, a bill or financial agreement, or issues with employees. Businesses that use independent contractors to provide services need to have written contracts with these workers. They must also make sure they meet the legal requirements for being defined as an independent contractor (see story in the HR Guide). Otherwise they risk running afoul of state labor laws, and could be held liable for worker's compensation or unemployment insurance taxes, Post says.
When a person sells his or her business, she continues, he or she should ensure that the sales agreement includes clear language of what is included in the sale, particularly any expectation of future business performance and the rights the new owner may have to receive advice or information from the seller after the sale.
Post also says businesses planning to lease space should be prepared to bargain for lower rents and shorter leases than a landlord offers at the outset. A three- to five-year lease is typically what a landlord will try to get a business to sign. But (a lease of that duration is) risky for a new business, Post says.
Some business owners can become overwhelmed by the myriad details that demand their attention on a daily basis. However, attention to detail is not only important from an organizational standpoint, but also critical to a business's ability to control costs. Businesses need to know how to plan, but also how to execute that plan, evaluate its effectiveness and be able to adapt as circumstances change, Laux adds. That's the key for any business, he says.
Do the Leg Work
Not all news from the recession is bad news. Economic shakeups often lead to a rise in new companies being started as people seek to control their own destiny, says Glasheen. They were out of a job and they were trying to take charge of their situation, he says. Last year, the Lakes Region SCORE chapter counseled 165 new clients-a record-and about 50 percent were start-ups.
Someone looking to start a new business needs to be prepared, and to be patient, Glasheen and Laux point out. Not only are banks going to want to see detailed financial information, they are going to insist that the applicant put together a detailed business and marketing plan that covers a prospective business's target market as well as its competitive position in that market, and also spells out intended operating procedures, the level of hiring required, and insurance. About 35 percent of the clients that come to us need funding, says Glasheen. The better the business plan and the better the financials in the business plan, the better the chances (they have) of getting the funding from a lender, he says. And they need to be prepared to go through at least three banks even if they have a good plan. No bank is going to approve a loan right away.
Whether you're a start-up or an established business, today's economic climate requires companies to be nimble, think long-term, be detail-oriented, and shore up their weak areas as well as build on their core strengths.
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