Virtually all small business-related articles are positive. They're motivational, inspiring and generally reinforcing of the fact that entrepreneurship is fantastic and you're going to be great at it. But the reality is that a lot of new ventures fail. According to the Washington Post (and not Rand Paul), "basically, after four years, 50 percent of businesses started are still open." (As the article notes, there are varying studies and perspectives on this issue, but we can generally assume and agree that not every business launched is going to make it.) Naturally, that means a lot of business wind up closing. The key however is recognizing the signs that it's time to close your business. After all, staying on a sinking ship for all the wrong reasons isn't going to work out. So let's explore a few factors that can serve as great indicators that it's time to close your business...
The Bottom Line
Your P&L statement will give you a clear view of what your business is earning versus what it costs to stay in business. When you first start out, it's natural for losses to outpace revenue. It simply costs money to get a business up and running, but you want to have forecasted projections. You want to be able to set targets of when your business will climb out of the red and into the black. And you want to set year-on-year growth metrics based on net profit, aka, the bottom line. If business isn't meeting those targets, you first need to ask yourself why. Unfortunately, there's no silver bullet answer here. A lot of it depends on your business, your sales channels, your customer retention, your COGS, your payment terms... the list goes on. But if your bottom line persistently is negative (meaning you're operating at a loss), you should have a conversation with a business advisor to figure out if there's anything that can be done. If there are actions to be taken, take them—but also recognize that the ultimate action might be to shut down operations.
Understanding your business's cash flow is like a real-time view of what's coming in against what's going out. If you business is consistently unable to meet its liabilities (aka, debts or expenses) on time, that's a red flag. Strained, or negative, cash flow may be indicative of the fact that it simply costs too much to be in business. But before you go down that road, consider the following...
- Are there ways you can increase in-flow?
- Are there ways you can decrease the time it takes clients or customers to pay you?
- Are there expenses you can tighten or do away with entirely?
These aren't easy questions to answer, but they are worth considering before your pack it in.
Pro Tip: There's a certain accounting app out there that can help you pull your P&L reports instantly and give you a good look at your cash flow. It rhymes with the sound people make when they sneeze...
While the first two signs that it might be time to close your business are much more quantitative, there are other things to consider besides numbers—namely, your happiness. Happiness in work (particularly when you work for yourself) is usually directly correlated to happiness in life. If you're venture isn't contributing to your happiness, you should probably rethink things. Of course there are many things to weigh against the happiness quotient:
- Is your business profitable and affording you and your family a nice life?
- Is there potential for your business to grow?
- With growth, would your role change and perhaps impact your personal happiness?
You're in a Race to the Bottom
If what your business offers or sells is becoming so commoditized that you're simply in a race to the bottom to achieve the lowest price, that may be an indicator that it's time to close your business. Is it an absolutely truth? Of course not. If securing the lowest price means winning the market, that's certainly a strategy worth considering. But assuming your race to the bottom will impact inbound cash flow, you'll likely need to adjust your expenses and the cost of doing business. Again, feasible, but you'll want to spend some serious time planning and projecting. Ultimately, however, you don't want to find yourself in a situation where you're sacrificing quality.
Closing your business can be tough. In fact, it's probably the toughest business decision you ever might have to face. But as previously mentioned, getting out while the getting's good can help you move on to your next adventure sooner rather than later.
If you've shut down a business before, tell us in the comments what made you do it.