Can this business be saved…?

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Recently I was reviewing the spending habits of a business as the business was attempting to borrow more money. If you have borrowed (or tried to borrow money) in the last few years, you already know how challenging this has become.

To get to the point, this company’s spending seems to be out of control and the challenge is to figure out how to help them (or if they can be helped).  I know several of our readers are familiar with issues like this so I’m going “open book” and asking for your opinions, suggestions, and recommendations.

A little background on the business…

It isn’t a startup company, so there is little probability the company will achieve exponential growth in the foreseeable future.

They started with a very focused product offering, but today they are very diversified in their product offerings and may be in too many markets.

What started out as a very lean operation (Taiichi Ono and Henry Ford would have been proud) has grown into a business with several layers of management and labor.  Many would describe it as bureaucratic.

Their HR department is stretched to its limits.

Clear inability to control spending. The business claims they are getting control of their spending, but their track record says otherwise as they have increased their debt by over 60% in the last 5 years.

Their “projections” for revenue increases over the next 5 years are about 10% / year, but they still plan to spend more than they make each of those years.

Time is running out – their bank is pushing back on more borrowing as they are already carrying a substantial debt.

By the Numbers: The business, this year…

$246,900

Projected business income

$379,600

Total business operating budget

$132,700

Additional debt  projected for this year
$1,605,100 Current outstanding debt the business has.
$11,000 Est. Avg. amt. they are projecting to reduce additional debt/year (next 10 yrs.) NOTE – Not reducing the outstanding debt, just reducing the amount they are adding to it each year.

 

The struggle is getting the business to act on their spending problem. The entire management team is aware of the issue, but they just keep on spending! Currently they are tactically focusing on reducing the additional amount they are borrowing. Reducing the outstanding debt is rarely even talked about it.

Can this business be saved? As business owners, do any of you know a bank that would be willing to loan them additional money? Is it making you feel better about the financial condition of your business?

Now, the real world…

What if this company was bigger? What if we added “7” zeros to each of the numbers above. What do you get? The actual numbers of from the United States Federal Government (as reported on Wikipedia – note, these may or may not be completely correct, but it’s pretty close).

$2,469,000,000,000 2012 US Tax Revenue
$3,796,000,000,000 2012 Federal Budget
$1,327,000,000,000 2012 Federal Deficit
$16,051,000,000,000 2012 National Debt (See National Debt Clock for up to date information)
$110,000,000,000 Est. Avg. amt. currently projected to Deficit/year (over next 10 yrs.)NOTE – Not reducing the outstanding debt, just reducing the amount of the deficit.

Final Thoughts…

The point of this isn’t to be on one side of the political fence or the other. It is about looking at the facts. It is what every business owner has to do. We have to look at the facts; this is where the business is at today, it doesn’t matter how we got there, but continuing to do what we are doing is not going to solve the problem. No business can survive when it continuously spends more than it makes.

The values can get easily blurred in any business, but sometimes I think it is easier as we jump between millions, billions, and trillions. By reducing the Federal Government numbers to an income amount many business owners are familiar with, it is easy to see the severity of the situation we have allowed our country to slip into. So regardless of who you plan to vote for this fall, fiscal responsibility is a key requirement going forward – regardless if the company has revenue of $246,900 or $2,469,000,000,000. You need to have a plan to spend within your means and hold yourself accountable.

We’d love to hear your thoughts – share them in the comments below.

Chris Steinlage    Kansas City Business Coach.

6 thoughts on “Can this business be saved…?”

  1. JoeTierney says:

    Certainly analogies are helpful as we work to understand and explain our world. Fortunately for the United States of America. Micro and macro economics have little in common.

    A sovereign country, with its own currency, has many options unavailable to a business, household, or individual. The country also has a more complex “mission statement” in which the goal is not profit, but prosperity.

    The US has had a higher debt-to-GDP in the past and several modern economies, including Great Britain and Japan, have run 100%+ debt-to-GDP for much of the past 100 years without issue.

    The assumption is that debt is expensive and certainly at the micro level this is typically true (although not always, i.e. 0% on a car) but at the macro level this is not typically true because “expensive” becomes a relative term and debt a required management tool – money put in and pulled out of the economy. Microsoft and Google for example carry long term debt even though they are successful businesses. And despite the popular narrative, the United States is still the world’s strongest economy.

    US bond rates are at historic lows and although we hear a great deal about the Chinese, a large majority of bonds are actually being purchased by corporations and the Federal Reserve. Adjusted for inflation, bond rates have even been negative – purchasers in affect paying the US gov. for the privilege of buying debt!

    So, does the United States currently have a debt problem? No. We currently have an unemployment problem. It is more expensive for the United States to run high unemployment than it is high debt-to-GDP. We should print money and spend our way out of this sluggish economy.

    It’s also important to note that we are talking about a ratio. How did we pay off our debt last time it was ~120% of GDP? We didn’t. We just grew our GDP faster than our debt and what do you know? The good old USA is still here.

  2. Joe – I’ll look forward to hearing Chris’s thoughts on your comments, but thank you for the thoughtful response.

    I absolutely agree that growth and revenue solves a lot of problems…and if the current debt level was stable, I’d feel a lot better about where we go from here. However in my opinion the trend line…not just from the last 3.5 years (which is awful) but the last 10 makes me extremely concerned.

    Historically it has been possible to grow out of things, but right now I don’t see a lot of room for revenue growth in this situation…and just printing money runs a significant risk of inflation or hyperinflation. Interesting (and scary…at least to me) discussion.

    Shawn

  3. Brigitte says:

    Very interesting comparison Shawn. Although Joe makes some interesting points (ie; that micro and macro economies certainly are different) the problem is that the macroeconomic system is inherently flawed (ie; governments should be accountable for their debt management in exactly the same way small businesses are). They may have tools at their disposal that help manipulate the system temporarily but the fundamental truth is this : fewer and fewer companies in the developed world PRODUCE anything. Less production = less jobs, less revenue, more debt. That governments are able to just print more money when they get into trouble is the problem. Unlike a small business there is no accountability or sustainability based on real fundamentals.

  4. Brigitte – I’m with you. I agree that the complexity at the Macro is a multiplier, but at the end of the day…you can’t live forever beyond your means.

    Shawn

  5. Chris Steinlage says:

    Joe, Bridgitte, & Shawn,

    I appreciate the discussion. First of all I want to say I am not an economist and I was not pretending to be one in writing this. To me microeconomics has been pretty logical, but macroeconomics seems more like voodoo magic. They are two different animals but one does have an effect on the other. Since macroeconomics was introduced in the’30’s there have been arguments made that the tweaking of the economy has failed as much as it has helped. So I will leave that discussion up to someone else.

    The main point of this blog was to get business owners to think about responsible spending. There is a cost for debt at just about any level…even that new car with 0% financing offers “x” amt of rebate for paying cash. That is the cost. I am not saying debt is bad, it just needs to be managed responsibly.

    The financial numbers were presented as revenue and spending of a mature business. The reality is if a business with $1.6M in debt but had $20M in assets, there would be plenty of banks willing to lend them money. If they had $2M or less they would probably get declined. This focus was meant to be about their spending habits and what direction they were heading if they kept repeating them.

    As for improving your financial position (GDP) without reducing expenses (Fed Budget), for the financially strapped business owner simply increasing the profitable sales (growth & revenue) is a great grow the business. That was some of the best advice I remember getting from a dealer mentor as I was growing my equipment business…”you just need to watch your margins and sell, sell, sell!”

    The same would be true with the US GDP (1.7%), but to keep up with the spending some suggest it needs to increase to nearly 6%. If printing more money is the answer how much money do you need to print to make that happen? What is the value of the dollar going to be then?

    I will digress back to the point of this blog. Successful businesses watch their expenses, set budgets, and generally spend less than they make. They typically have cash to weather minor setbacks and recessions because they are prepared for it. Our Federal Gov’t could stand to take a few notes on the spending within their means.

    Chris

  6. Les Holthaus says:

    Chris, as you know, until we hire or elect people that are capable of doing their job, it will never
    Change. I firmly believe we shouldn’t allow anyone to represent the people
    If the haven’t successfully ran a legitimate business. You know what we
    Would do, cut the fat! I believe we will have to take a great fall before
    anyone wakes up!

    God help us!

    Les

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