Businesses fail for any number of reasons.
Here are several several warning signs that your company may be headed for trouble.
The giant customer trap
Companies can find themselves in trouble if too much of their business is with one account.
“You find out they’re doing 50 to 75 percent of their business with Walmart, and they’ve got a problem,” says Peter Tourtellot, chairman of the Turnaround Management Association and managing director of Anderson Bauman Tourtellot Vos & Co. “Because the leverage is now with the customer, and you’ve got none. And so they’re forcing you to really sell, in many cases, at losses.”
Tourtellot says a well-run company should have no more than 20 to 25 percent of its business with one customer. To determine whether you’re too invested in one customer, imagine what would happen if that customer left.
“If they go away tomorrow, will it cripple you?” he says. “The trouble is, when they have a little correction they’ve got to make, if you have that kind of business with them, you’re going to be in very choppy waters. You’ve got to diversify your customer base.”
No succession plan
Tourtellot says companies both private and public should have a plan in place.
“If you lose people, through accidents, death, or because they decide to resign, are you left without anyone who’s competent to take your place? Too many times, that’s exactly what happens,” Tourtellot says.
And don’t forget to provide training for those in line to replace top people. Too often, “people get promoted to jobs that they’re not qualified to do,” he says.
Poor lender relationships
“Many companies, when there’s bad news, they clam up, they don’t want to communicate, and that’s the worst thing you can do,” Tourtellot says. “They’re not informing their lenders, they’re not keeping an open door, they’re not being candid with them and letting them know what problems they have. Then when the lender finds out … and he feels the company has hidden that information, the company’s credibility is hurt and the relationship may become adversarial.”
Jean Robertson, a partner at McDonald, Hopkins, Burke & Haber Co., LPA, says it’s vital to be up front with your bank.
“Banks and companies, if … they’re talking all the time and the bank knows what the business is doing, and the business is telling them all the good things and all the bad,” then the relationship is a healthy one, says Robertson. “When the communication breaks down, that’s when the bank becomes very uneasy and starts to pull on the purse strings and become less flexible. There has got to be trust.”
Explosive growth
Rapid growth is not always a good thing, says Tourtellot.
“Explosive growth costs money. You cannot grow and outstrip your financing,” he says.
When you grow, you have to grow with product.
“That means you have to have more product and you have to go out and buy more raw material,” he says. “You have to find plants to make it in, so you have to add employees. You have to add infrastructure in terms of machinery to produce it. Then once you’ve produced it, you now have to ship it, and when you ship it, you produce an account receivable.”
Typically, it takes the customer 30 to 45 days to pay. But in the meantime, you’ve already paid your suppliers. “If I buy the raw material from you and it takes me 30 to 45 days to produce it and get in to my warehouse, I have paid you in 30 days, but I have yet to ship it to my customer, who’s going to take another 30 to 45 days to pay me. All of that needs to be financed. We call in hazardous growth.” How to reach: Peter Tourtellot, (336) 275-9110 or www.turnaround.org; McDonald, Hopkins, Burke & Haber Co., LPA, (216) 348-5400 or www.mhbh.com
