The biggest mistake the owner of a distressed business can make is waiting too long to act. A sense of urgency should be the driving force for turning around a distressed business. Wasting time increases the risk that other unexpected disruptions could destroy the business. Many failed businesses could have been saved had the business owner addressed the red flags sooner. To avoid a similar fate, it is crucial to understand the fallacies that drive business owners to wait too long to act:
Boiling Frog Syndrome
If you put a frog into boiling water, it will jump out immediately. But if you put a frog into tepid water and slowly bring it to a boil, the frog will not recognize the danger and will be cooked to death. This fable can apply to a distressed business owner who has no sense of urgency regarding the situation. If a business owner is not reacting to gradual threats, the business could ultimately fail. Treat the distressed situation as a crisis to instill a sense of urgency among your management team to resolve the issue.
This occurs when one becomes “paralyzed” from overthinking the possible solutions to the problem. Decision-making is hindered, and no course of action is decided on. Since it’s likely this is the first time the business has faced this issue, many business owners fear selecting the wrong course of action. PCE’s 10 Tips to Consider Before Filing for Bankruptcy is useful for business owners who are unsure if bankruptcy is the right solution.
Believing the Situation is Beyond Your Control
Assuming the business will rebound with the economy is a fallacy many failed business owners have fallen prey to. The business owner recognizes the distress but believes the solution is out of his/her control and there are no solutions. This mindset will not fix the problem. Take a proactive approach to identify possible solutions, and seek the guidance of external consultants, if needed.
Some distressed business owners wait too long because they are unaware of the situation. It could be a function of not monitoring key metrics (cash flow, margins, etc.) for downward trends. Or it could be overly optimistic managers reassuring the owner that the situation is under control when it is not. Business owners must do their due diligence into the issue or seek external consultants to assess the situation, if needed. Monitor key metrics frequently and communicate findings to key managers in weekly meetings until the problems are resolved.
General Resistance to Change
“Our business has operated the same way for years, so we don’t need to change anything,” says the stubborn business owner who refuses to adapt to the current business climate. Change is difficult for many people. It represents venturing into the unknown, which can be uncomfortable. Shame or embarrassment about the situation could also contribute to a resistance to admitting change is needed. Keep an open mind as the solution to the issue may require some creativity.
Too Short-Term Focused
Distressed businesses are often just trying to stay afloat, causing owners to become nearsighted on day-to-day operations and lose focus on the long-term downward trends. The business owner might underestimate the long-term impact on the business or view a line of credit as a safety net. Relying on a line of credit will only exacerbate the issue if the underlying root cause of decreasing cash flow is not addressed. A detailed weekly cash flow schedule is a useful tool for having financial control and an understanding of business operations.
Certain business owners may be overconfident that they will be able to solve the situation. This could result from underestimating the severity of the situation or the time it will take to resolve the issue. Overconfidence reduces the sense of urgency and could delay the execution to fix the problem in a timely manner. You need to question yourself and seek opinions from others such as your management team, accountant and attorney. This is not a time to think you are a hero.
Many people fall victim to procrastination and simply do not act. There could be a natural inclination to sit and wait for things to change instead of effecting the change yourself. It could be the stress of the situation is preventing action, which could become a vicious circle. Forgive yourself for procrastinating in the past, and turn your focus to acting now.
Don’t wait until it is too late. Now is the time to act. We understand the difficulty of turning around a distressed business, so we created the PCE Distressed Resource Center to provide business owners the resources to understand their options. We hope you find the information useful.