Your business is bleeding red ink

Posted: June 24, 2013 in Up-and-running Business
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I spent several posts discussing start-up businesses. I will devote the next few posts to businesses in trouble. A business that is “bleeding red ink” is not only losing money on a month-by-month basis but is in a deficit position in its Cash Flow From Operation (CFFO). This is bad news!

First of all – do not let it get this far. This statement seems intuitive but it happens a lot since most small business owners want to “wait it out.” Their attitude is that the customers will return.

When a business loses money (on paper) it won’t be too long before the cash flow is affected. Profit and loss statements contain accruals (both revenue and expenses) that are stripped out in computing the CFFO. Many business owners have a quick fix for this – “just collect the outstanding accounts receivable.” That will work – up to a point. If revenue is flat or declining the business will accrue less and less receivables. The impact will be felt starting 45 days into the future.

You need to have your accountant prepare a (going forward) breakeven point in revenue. The equation is:   FIXED EXPENSES/1-VARIABLE EXPENSES/REVENUE.  I have done this for clients and the breakeven point surprised them – it was so high. It should not really come as a surprise but, most organizations grow on the back of fixed expenses: more staff, more space, more fixed assets and amortization. Business owners fail to forecast the impact of fixed expenses on the price equation. Revenue might increase but gross margins may not. Revenue increase is not always accompanied by increases in net profit.

More on this in a later post.

 

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