Much like no one gets married to get divorced, no one opens a business to close it.
Still, it happens. The optimism of opening day can give way to the harsh realities of the small business environment, from rising product and labor costs to an intense competitive environment to the unending quest to please customers.
To be certain, money isn’t always behind a closure — issues with a landlord, entanglements among partners, or retirement might also trigger an end — but the financial headwinds of modern times are real and many SMBs, even established operations with proven business models, can fall prey to the delicate bottom-line balancing act. Costs rise. Sales slump. And suddenly, operators are struggling in the red.
The obvious question: What’s one to do?
The typical response — and what it should be
Joel Reynolds, an associate professor in the School of Hospitality & Sports Business at DePaul University, says many operators facing a red balance sheet react with a major pivot. They overhaul their menu or product lines, expand operating hours, slash labor or invest in expensive marketing campaigns.
“And any of those decisions can be an overcorrection,” Reynolds says.
Instead, both Reynolds and Kevin Murphy, a professor at the University of Central Florida’s Rosen College of Hospitality Management, urge struggling operators to step back and extract emotion, an admittedly difficult task for entrepreneurial folks rich in drive and self-belief.
“But objectivity is huge when you’re stuck in the red,” says Murphy, who also spent 25 years owning and operating restaurants before entering the academic ranks.
Murphy suggests sitting with an accountant to get an unfiltered financial analysis and gathering market data on sales in the area as a comparison.
“You have to analyze your ability to make a profit and understand how your [business] — its prices, its positioning — stack up in the marketplace,” Murphy says.
Neutrality is key, as an earnest review of the numbers will help generate an honest appraisal of the business and steer next steps.
“You have to use data — year over year or even month or month — versus a gut feeling,” Reynolds says.
Determining the range of the problem
With data in hand and emotion parked on the sideline, it’s then important to evaluate if the problem is short-term, long-term or systemic, as that will inform action.
A short-term problem might be the heightened cost of key materials due to supply shortages or it could be a city infrastructure project minimizing street traffic for multiple months.
With short-term problems, Murphy says savvy business owners make incremental changes to reduce costs or raise revenues to withstand the pressures. A pizzeria, for instance, might leverage its point-of-sale (POS) data to better track customers and communicate with them to stimulate repeat visits, such as delivering personalized deals or limited-time offers to their inbox. Operators might also investigate alternative ingredients from suppliers to trim costs, provided the substitutes do not hamper quality.
Long-term problems can be trickier. Perhaps the neighborhood demographics have shifted, and local residents aren’t the pizza-eating crowd they once were. Maybe the area has become saturated with dining options and intensified the battle for customers. Murphy recalls one corner location hosting a revolving door of restaurants despite thousands of cars passing by its door daily. The reason? There wasn’t enough parking.
“Long-term problems are ones you can’t fix overnight,” he says. “You need a proper analysis of the situation and to determine if you can realistically make changes to deal with the challenges you’re facing,” Murphy says.
Systemic problems are issues inherent in your systems. These can be fixed with thoughtful, strategic action.
Evaluating solutions — and the cost
When facing a red balance sheet, some solutions will jump out and be relatively straightforward to implement.
Digging into the data, biz owners can examine the sales and costs of every particular item and re-engineer their product lineup, accordingly, eliminating items failing to move the sales needle or those with a low profit margin. If labor costs regularly outpace sales during certain hours, then examining your employee scheduling might make financial sense. If business isn’t what it should be, then targeted marketing can drive revenue.
Other solutions to turn the balance sheet from red to black may prove more challenging and require honest reflection and deep personal assessment. Is there willingness to attempt a lease renegotiation with the landlord or to have candid conversations with management or family members?
“As you look at the problems you’re facing, are there realistic solutions you’re willing to tackle?” Murphy says.
In some cases, tough as it might be, leadership might need to evaluate if it makes sense to maintain operations.
“At this point in your life, maybe entrepreneurship isn’t what you need,” he says. “There’s so much more than the performance of the business to consider, like how work is affecting your life.”
DANIEL P. SMITH is a Chicago-based writer who covers business issues and best practices for a variety of trade publications, newspapers, and magazines.
