How to Stay Alive When Business Shrinks
I am the second-generation owner of a wholesale shade-tree nursery that has been in business for 30 years. When we were profitable, we were making more than $500,000 a year. But over the past three years, we have lost more than $300,000 a year, largely because of the downturn in the housing market. I've used my equity and retirement savings to keep going. As a result, 80 percent of my net worth is gone. Meanwhile, the bank is threatening to close my line of credit. My CPA thinks we will be OK if we can just hang in for two more years, but if I don't secure new financing, we won't make it. I love this work, but I am struggling to see the future. Do I keep going? The economy is improving, but maybe not fast enough. What would you suggest?
Accountants are historians. They are good at telling you what a company has done in the past, but it's always dangerous to take a CPA's business advice going forward. I was concerned that this writer—let's call him Jim—might make a disastrous mistake based on his CPA's assurance that he just had to hang on for two years. The CPA, it seems to me, is assuming that the real estate market, and thus the market for trees, will bounce back by mid-2014. That is highly unlikely, in my view, and certainly not something to count on.
After talking to Jim, it wasn't hard to diagnose his problem: His cash flow from operations is not enough to cover both his operating costs and the annual payments on his debt. Although the company's sales have improved since bottoming out in 2008, they are still—at $790,000—barely 40 percent of what they were at the height of the housing boom and $400,000 below his breakeven point. Could sales increase enough in the next two years for the business to become profitable? Who knows? There are no large, untapped sources of revenue Jim can go after, and so his fate depends entirely on what happens in the housing market. Meanwhile, he can't cut operating costs any more than he has. He would thus have to borrow more money to stay afloat while hoping for a miracle rebound in the market. Without one, he could be even worse off in two years than he is today.
I offered Jim an alternative scenario. "What if this change in your business is permanent?" I said. "What if you will never get back to the level of sales you had in the past? Maybe you should figure out how to stabilize the business at its current level." For example, his nursery occupies about 400 acres. He has more land and more trees than he will need even if the housing market recovers completely. I suggested that he run a sale on trees to reduce his inventory and consider selling half his land. He could then use the proceeds of both sales—land and trees—to pay off his debt. His operating costs would be lower after downsizing, and his breakeven point would drop accordingly. "If your goal is to stay in business because you love it," I said, "you'll be better off cutting back now than floundering for two or three more years, hoping sales will improve. That will do more than eat at your equity. It will eat at your heart." Jim thanked me and promised to let me know what happens.
NORM BRODSKY | Columnist
Street Smarts columnist and senior contributing editor Norm Brodsky is a veteran entrepreneur who has founded and expanded six businesses.