You Missed Your Number. Now What?
Many companies face that month or quarter when there is a miss. Even though you thought you did everything right, your financials simply aren’t where you would have liked. You get your quarterly unaudited report from your controller, and the bottom line is red. You know this might mean a call from your creditor after you submit that data, and you can do the quick math to see if you tripped a covenant.
But is there anything you can do? You bet!
Figure out why you missed
You may very well know exactly why you missed, simply because you have been running your business for a long time and it’s clear what went wrong. A deeper analysis is still in order. Better not to assume you know everything.
Your budget should show your major revenue and expense categories, your monthly target for each, and what actually happened. These metrics help you gain some legitimacy with your lender. You can show the lender which line item really drove the problem this period. Be prepared to explain what happened, or what didn’t happen, and why you didn’t hit your number. The better you can articulate that, the more effective your lender will believe you are in managing your business.
Stay on top of cash
Businesses with debt don’t fail when they lose money -- they fail when they can’t meet their outbound payments to a vendor, a lender or employees. Even if you miss your number, you need to make sure you are on top of your cash and able to meet your short-term liabilities. You should have short-term cash flow forecasts, particularly for those times of the year when cash is most likely to run low. No creditor wants to get that double-whammy phone call: “We lost money and we can’t meet payroll.” That’s when a downward spiral can accelerate.
Make the change
If you can change something in response to what went wrong, seriously consider it. You may be able to say, “that was just a blip,” but if you respond to it appropriately, you might be able to prevent it from happening again or better prepare yourself if it does. You may also be able to lower or delay current expenses to match a drop in revenue. But if a change is needed, you may need to embrace that difficult decision.
Know your covenants
Remember the loan document you negotiated and signed? Inside it, amidst the terms and conditions, are covenants. You should have simple metrics and calculations established for your business that measure and track the figures that can trip these covenants--or show how close you come to tripping them. Your accountant or controller should know these metrics, so you can do all you can to avoid tripping your covenants. Know when you are going to miss, and prepare ahead of time.
Pick up the phone
Bad news only gets worse with age. Call your lender as soon as you have gone through the steps above. They want to know what went wrong, why it went wrong, what it means for the loan, what you are doing about it and what your cash position is.
Prepare for that call by prepping with your controller. It’s human nature to respond better when someone is proactive and thoughtful. Better for you to anticipate their questions and prepare than to get defensive or risk a breakdown in what you know will be a difficult conversation. Be upfront and candid. Tell your lender what’s going on and importantly, what you are going to do. You will stand out against all of the business owners who aren’t being proactive.
Even the best companies can miss their numbers from time to time. There is uncertainty and risk in running any business, and you can’t always match the projection you made in your annual budget. When it happens, figure it out quickly, ask yourself the hard questions, and take proactive steps to manage your business.
ED POWERS | Columnist | Head of Capital Access Funds, Bank of America
Based in New York, Ed Powers is a managing director and head of the Capital Access Funds team at Bank of America Merrill Lynch. Capital Access Funds is an experienced, returns-driven private equity fund-of-funds.