Choosing to Stay Open, or Close With Dignity
By Betty Penny
For whatever reason, businesses close. It is inevitable that most businesses must someday close their doors and no longer be a business. The typical life cycle of a business consists of starting up, building its client base in the first few years, becoming known in their community and respective industry, creating success, and growing. Then, sometimes without warning a market decline ensues, downsizing happens and the eventual close.
None of us likes to think about the latter part of the story, but when we are experiencing hard times with our respective market, it is important to know how to conduct ourselves in order to walk away with more than just collective experience.
According to the Statistics Canada, there were a total of 10,791 bankruptcies in commercial sectors last year. This is happy news compared to 14,229 commercial bankruptcies in 1996, when retail, construction and accommodation services were being the hardest hit. Closures far outweigh bankruptcies, statistical data doesn’t even exist that traces exact numbers. Best estimates for closures are three to one, meaning that for every bankruptcy there are three additional closures. This means in Canada last year we had approximately 40,000 businesses close.
Industry Canada states that there are three ways of closing a business. First, is where the business has ceased operations and become defunct, this is known as a Defunct Business. Second, comes temporary closures – where a business has temporarily closed or suspended its operations for any number of reasons including labour disputes, shortages of raw materials, shortage in demand for its product, periodic fluctuations in the business cycle or temporary financial difficulties; it is still considered to be a "business". The last type of business closure is when the business is in Receivership or Bankruptcy. When a bankruptcy happens, a business has not gone defunct by reason, only that its assets have been placed in the hands of a Trustee in Bankruptcy pursuant to the Bankruptcy Act, or that its assets have been placed in receivership. Provided the trustee or receiver is carrying on the operations with a view to disposing of the business as a concern, or to reorganizing its affairs, it is still considered a "business".
The following are ideas to avoid having to close your business doors completely, if you are experiencing a market decline, or are feeling financially strapped. Not all of the suggested areas of investigation may apply to you, but one or two may offer alternatives that can generate enough time or money, to see your way clear and stay in business another day.
The first thing to examine is the company’s credit. The availability of credit to businesses helps in keeping customers happy and entices buyers to do business with your company. The major problem that arises with credit sales is this: As much as 25 per cent of the company’s assets are tied up in accounts receivable (money owed to a business from customers for goods and services bought on credit). This then means the company must spend its own money to pay for the goods and or services already provided to the customer, who bought on credit. Some basic ways to avoid this is to provide cash discounts to purchasers who pay quickly. In essence the credit policy of the company reflects its financial position. If credit has been refined to have as quick payments as possible, then other areas such as short-term loans may be required
Cash flow is another area to be closely examined. Many businesses have problems ensuring their cash receipts and disbursements are in order. In the perfect world there should be enough cash to meet payments as they fall due. Sometimes large companies have to sell off prime subsidiaries to raise enough capitol to do so. Case studies like Olympia and York, and Campeau Corporation in the early 1990s demonstrate how companies can be destroyed by cash flow problems.
Cash flow problems may in fact be caused by too quick growth, with the purchase of new equipment to increase production to meet demands. Growing slowly gives companies the opportunity to avoid this problem. Or, as is often the case, companies can tie up too much money in inventory or let customers delay payments. If you hire an accounting firm before getting to far with your business, they’ll prepare (with your help) a cash-flow forecast. This is a schedule for one year that shows what your cash situation will be each month. It can be prepared optimistically, pessimistically or realistically. Each has opportunity or best case (optimistic) or worst case (pessimistic) scenarios. Realistic usually gives an accurate picture of how the company will or should be operating on a month-to-month basis.
These are just a few suggestions that will hopefully help you avoid bankruptcy. Businesses need to be aware that competition is stiff, business can be brutal, but with a little know-how and inspiration mixed with perspiration, you can make it work and win.
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