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“We aren’t going to make payroll”
At some point every entrepreneur will have a sleepless night because they won’t know how they are going to make their next payroll. By the time these thoughts are passing through their mind they would have already missed some warning signs along the way. While this is a very tough moment to get through, it is also a very important moment. Any entrepreneur that is doing something worthwhile will eventually reach the edge of a chasm that they will need to get across in order to succeed. There is no greater pressure point than having to face the people on your team who pay for their life with the job your business provides.
When you know your business won’t be able to make payroll you will need to take some immediate steps which could include:
- opening a bank account at a different bank or financial institution so you can deposit checks from customers and clients and pay your staff
- contact a trustee or bankruptcy expert who can guide you through getting some relief from creditors while you put together a plan
- getting in touch with creditors to discuss with them the state of your business and what they can expect
- laying off staff or updating them on the state of the business so they can make the plans they need to make
After you have dealt with the emergency you need to begin working through the problem of understanding how your business got into a position where it couldn’t make payroll. What is the root cause of the problem? Many times entrepreneurs will say the root cause is simply not having enough money – but that is rarely true. The root cause tends to be high overhead, low margins, poor cash flow management or a combination of many different variables all colliding at the same time.
If you are able to figure out what is going on in your business the next question you need to answer is: Can this business be saved? If the business can be saved, what needs to happen to save it? As you begin to put your plan together you should consider all of the stakeholders and how you will get them all on board. Do you need to negotiate with your landlord? Do you need to offer creditors something less than 100% of what they are owed over a determined period of time. Do you need to renegotiate your debt with banks and other lenders that your business owes money to? If every stakeholder gave you what you wanted, why would they agree to support your business? They need to believe that supporting your business in this tough moment is a better option for them then watching the business close its doors. Your ability to understand your current situation and articulate your go-forward plan can mean the difference between rebuilding a business and closing it down.
The Never Never Deal
The most common conversation I have with entrepreneurs is around capital. Many business owners who are out of money think that borrowing more money at any price is the only option they have to survive. I have yet to see a situation where this actually works in the absence of knowing what caused the business to stumble and what the plan is for nurturing it back to health. New capital, if you business can access it, will be very expensive and will have very onerous terms. The cost of new capital could result in your business signing up for a never, never deal. Your business is never, never going to be able to pay it back because as the business recovers any free cash flow will go to service high interest rate debt that can be difficult to refinance. In some cases it would have been better to shut the business down than agree to take new capital that benefited from a difficult moment. Capital is helpful if a plan can be created that demonstrates profitability and milestones and gives you the ability to know what your business can afford to pay and how it can repay any additional borrowing. Some businesses will seek investors but the same problems arise. Investors can be aggressive in their terms if they sense that an entrepreneur doesn’t have a handle on their business. The more work you can do to understand what specifically needs to be done, the better access you have to capital and help.
There are no shortcuts or magic bullets to solving the problems a business has when they find themselves unable to make payroll. The work required is humbling, frustrating, stressful and painful but if you can understand what happened, put a plan together and talk with all the stakeholders involved, you will have a better business once the current moment passes. It’s important to remember that how you feel today is not how you will feel three, six or twelve months from now. People will be upset and disappointed but will also appreciate your efforts should you be able to execute on a plan that sees your business return to positive cash flow. Many business fail not because of the product or service but rather because the “business stuff” doesn’t get handled the way it should. Take this moment to fix the “business stuff” and get back to building value.