Struggles and challenges of small business owners

According to the U.S. Bureau of Statistics, 20% of small businesses fail in the first year and 50% fail by the fifth year. If that isn’t dire enough, only a third of new businesses make it to their 10th anniversary. Kind of sobering, isn’t? You invest years of your life, money, and hard work, and then you’re left with nothing. On top of that, you might have debt remaining from your failed business.

I know what this struggle feels like because I went through it. I caught the “be my own boss” bug just after college. I wanted to control my own destiny, not have someone telling me what to do, become a titan of industry and wealthy beyond my wildest dreams, help humanity, and leave my children a legacy. Sound familiar?

During college, I worked for a national tax preparation company. By the time I graduated, I was managing six offices that expanded to 10 offices in two years’ time. I managed over 100 employees and had responsibility over every aspect of the business, from negotiating leases to hiring, training, and firing employees. It was a lot of work and a lot of fun. But I wanted to strike out on my own.

I became a certified public accountant (CPA), helping clients plan and file their tax returns. I started my own CPA firm in a small office with one phone on a TV table and a chair for my receptionist. I grew the business aggressively and in five years, I had 25 employees and two partners. Not content with just my CPA firm, I also branched out into developing and managing commercial and residential real estate and became a partner in other businesses. Oh, did I mention I was in politics too? To say I was stretched thin was an understatement.

The importance of running and managing the business

A typical entrepreneur, I loved building the business more than I liked managing it. When the recession hit, the aspects of the business I had neglected began to show its cracks. My real estate projects became cash flow problems overnight. My CPA firm, suffering from lack of prudent management, started bleeding red ink. Suddenly, I was seeing tens of thousands of dollars in negative cash flow every month! In my fifth year of business, I was in danger of becoming one of the small business failure statistics and came uncomfortably close to declaring bankruptcy.

I was lost. I was fooling myself, believing everything would be okay, ignoring the ominous signs that the economy was tanking and thinking the recession would end soon. Thankfully, I was lucky in that I had mentors and friends who gave me time and honest, and sometimes brutal, advice. I had to face the fact that my financial problems as a business owner came from my lack of managing cash flow. I had to change how I view cash flow management—and I was a CPA.

How I recovered by adopting the chief financial officer (CFO) mindset

As the owner and chief executive officer (CEO) of these businesses, I had to make a choice quickly — declare bankruptcy, declare failure or “adopt the CFO mindset.”

Often, business owners are so busy working in their business that they forget to work on their business. Believe me, I get it; it’s far more exciting to make a sale and build your business than it is to review the budget. Entrepreneurs and small business owners are like “squirrels chasing chestnuts”—always searching for the next big opportunity—or distracted by the “shiny object”—ready to jump on new ideas as they arise. Their talent for creativity and finding opportunities comes with a major blind spot when it comes to running a business.

Properly managing and maximizing cash flow is critical to the success of any business. Often, these duties fall to the CFO, whose purpose is to guide the owner/CEO and make informed financial decisions for the business. CFOs set financial targets for the business and help effectively manage and utilize the company cash flow, achieve profitability, and unlock the company’s value.

Understanding your business cash flow Is critical to success

While I did have a finance and operations manager handling some of these business duties, I realized that I needed to take on the role of CFO myself if I expected my company to survive. And as CFO, my first task was to find out just how badly the business was doing. I put together cash flow statements and a budget. Believe it or not, this was the first time I had done this for a million-dollar business, so you can imagine how behind I was. Like a lot of small businesses, mine operated from the “checkbook accounting” method—meaning, as long as we had enough cash in our checking account, we thought we were doing fine. Given where the business was, I realized this was a dangerous method.

I became an expert in always knowing our cash balance and cash flow. Our bookkeeper put together a monthly cash flow report that projected six months out and updated it every week. This report was later expanded to show a full-year projection and updated twice a month. Now I knew where the company stood financially and about the possible pitfalls in the months ahead.

Building up cash reserves

Once I understood what the company cash flow looked like, I had to “stop the bleeding” and build up cash reserves. I had to take drastic action, which included laying off a third of my staff. This action haunts me to this day. My lack of proper management led to negatively impacting the lives of people who depended on me, and I knew that I had to learn from this painful lesson.

We also had to cut some essential services, like 401(k) contributions and bonuses. The remaining employees took pay decreases while I cut mine down to zero for six months. I called up every client who owed us money and combed over our accounts receivables. I offered incentive rewards for staff members who thought up expense-savings opportunities. We became very lean.

Next, I contacted all the vendors to whom we owed money and requested the following terms: stop collection on all outstanding payments from the past six months but continue to provide the services we need. We will pay for current services and promise to pay back every cent we owe for past services rendered but right now, we need some breathing room.

I let them know that if they didn’t agree to these terms, I wouldn’t be able to pay them right now anyway and will just find someone new to work with. They all agreed to help us. I had similar conversations with landlords and equipment leasing companies, anyone with whom we had a lease agreement, to renegotiate contract terms. I had to accept that if these vendors and service providers were going to sue me for breach of contract, I would have to deal with those repercussions. But building up cash reserves was paramount to our survival and these actions gave us more time to recover in the immediate months.

Over the years, I had developed deep relationships with many banking partners who provided financing for my businesses and real estate holdings. Some of these relationships were very meaningful and I counted some of these partners as friends. I had a reputation of being reliable and successful, but now I had the difficult task of explaining to them that I could not meet the payment terms. This incident felt like another personal low for me because it was tough to admit that I had failed and disappointed friends and people who trusted me. I requested new terms for repayment, whether that meant postponing payments, reducing payments or refinancing. I sold off real estate projects and properties, sometimes sacrificing prices for cash flow. Some banks agreed to take real estate holdings in exchange for the outstanding debt.

All these conversations and actions were difficult and painful. But it stabilized the business and helped us save tens of thousands of dollars. We also had to pivot to make sure the business was generating more revenue. As a CPA firm, we specialized in providing sophisticated tax planning and compliance. We added additional services, including accounting and cash flow planning. (The business crisis had made us experts, having to deal with these issues firsthand).

Steps to take if your company is in trouble

The business recovered and prospered. I eventually hired a CFO but never took my eye off the cash flow again. Even during economic downturns or market crashes, my company never again had surprise layoffs or faced using our cash reserves. We never had to depend on a bank again.

When the economy turns, markets change, or you find yourself facing tough times with your business, do not fool yourself into thinking it will end soon. Take immediate action. If you’re a business owner in a similar situation with cash flow, here are some actions you should take now:

• Understand your business cash flow. If you haven’t done so already, create a cash flow report and other financial reports (budgets, projected cash flow, etc.) to see where you stand. Aim to update and review these reports at least twice a month.
• Manage your cash flow. Where is your revenue coming from over the next 3-6 months? Constantly review every expense item in your income statement to find potential savings. Be aggressive about collecting payments and overdue accounts receivables. Ask for more payment upfront.
• Contact your legal, insurance, benefits, and accounting professionals. Tell them you need advice, ideas, and help. If they cannot help you or do not help you, consider replacing them. Your candor and honesty will go a long way in getting them to listen and act.
• Review all vendor relationships, contracts, and lease arrangements. Keep only the essential services you need and re-negotiate contracts and leases. Ask for a discount. Again, having honest conversations can help you get what you need for your business to survive.
• Secure lines of credit with your current bank or a new bank. Draw down the total amount and keep this cash at a different bank. Banks can withdraw money from your accounts without your permission if they see that your business is in financial distress. Refinance existing loans.
• Review your staffing needs. If layoffs are inevitable, try to gauge if your employees would be open to part-time hours or pay cuts instead. Perhaps some of them would be open to becoming independent contractors (this would help save payroll taxes and benefits). Hold off on hiring until your cash reserves are at an appropriate level.
• Double down on growth and client service. Even while managing your cash flow and expenses, you need to keep growing your business. Look for other revenue-generating products or services. Ask your employees for help. Consider incentives to reward employees who suggest an implemented business idea.

Even if your company isn’t in trouble now, it’s a good idea to take stock of these ideas to maximize your cash flow and grow your business. Don’t wait to work on your business when things get tough. Run your business as if you depend on every dollar of cash flow. If 2020 has taught us anything, it’s that none of us can predict the future. But you can always be prepared for the unexpected by adopting the CFO mindset.