Saving a Money-Losing Business With a Business Survival Plan

Small businesses are incredibly sensitive to both good and bad fortune. Catching an important entrepreneurial trend can result in quick growth and outsized profits. Unfortunately, the opposite is also true. When the economy sours, or for some reason your business niche falls out of favor, profits can turn into losses fast.

It's exciting and fun to expand a successful business by hiring additional employees, buying more equipment, renting new space, and doing all the other things necessary to grow. But there is precious little joy in quickly downsizing a business that has become overextended, especially one that has borrowed heavily to fund expansion, only to find that a declining market won't sustain it. Unfortunately, entrepreneurs whose businesses are suddenly operating in the red typically start by either denying they are in trouble or underestimating the severity. The result is that many businesses that could have been saved by rigorous early action quickly become so debt-burdened that they die unnecessary deaths.

When your business is suffering financial troubles, we recommend a three-step approach to making sure your business survives.

Step 1. Create a business survival plan. For example, if in the past six months, sales have been down 30%, your plan should convincingly explain how your business will be able to cut expenses, increase sales, maintain or reestablish an adequate profit margin, and manage (or attract more) cash so that in X months you'll be both profitable and have enough money in the kitty to bring past-due bills current.

Step 2. Prepare a current profit-and-loss statement and cash flow analysis. You can't do the planning or take the action that will be needed to turn around a recession-battered business unless you fully understand your business's key numbers. It's like trying to land a plane in dense fog without instruments—you'll encounter the ground eventually, but it won't be pleasant. Learn more about creating a profit-and-loss statement and cash-flow analysis.

Step 3. Establish an advisory board. This is a small group of knowledgeable small business advisers, people with enough entrepreneurial experience to understand your profit-and-loss statement and to review and challenge your survival plan. Learn more about creating a business advisory board.

As to creating a business survival plan, it will to think about how to proceed over the short, medium, and long term.

Short term: one to six months. In the short term, your job is to either develop an objective and realistic plan to get the business back to breakeven or, if that's not possible, to close or sell it. In general, you shouldn't allow losses to accumulate beyond six consecutive months. The only major exception to this rule is when you have an investor who is willing to put new money into the business under a long-term turnaround plan.

Medium term: six to 18 months. If you can make the cuts necessary to get back to breakeven in six months, you'll need to return your business to profit, usually through a combination of cost cutting and adopting effective new marketing initiatives. But if your locale or industry faces a deep recession, the best you may be able to do during this next year is to continue to break even. As long as you can pay your household expenses and you and your advisers conclude that the business has a bright future, sticking with it may make sense.

Long term: beyond 18 months. Your long-term plan must return your business to profit. No matter how much your ego is tied to your business and how much you believe it will eventually succeed, there's no long-term future for a business that doesn't make money. Cutting costs and increasing marketing may keep your business alive for the short term, but chances are good that to return it to solid profitability, you'll also need to adopt a series of business-enhancing innovations.

It's tough to run your own business during an economic meltdown. But just as in the Great Depression, many entrepreneurs are figuring out how to successfully accomplish it, and by doing so are putting themselves in a position to thrive when good times return.

To kick off your business survival plan, see Nolo's article 5 Tips for Turning Around a Financially Troubled Business.