Momentum Podcast: 856
What To Do When Your Business Is Losing Money
by Alex Charfen
It’s the emergency every entrepreneur has nightmares about but we are all too scared to plan for. Alex Charfen has run and coached six-, seven-, and eight-figure businesses through crisis, economic challenges, and emergency situations. This might be the most important episode of this podcast because having this knowledge can save you so much time, heartache, and profitability in your company.
In this episode of the Momentum Podcast, you will learn the process for what to do when your business starts losing money, and how to navigate the challenges that come along with that.
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Full Audio Transcript
This is the Momentum podcast.
One of the toughest situations to navigate when leading a business is when the business stops growing and starts to go backwards. When your revenues start to come down, profitability starts to come down. And even worse, when you start losing money. Now, after 30 years of running and growing and coaching businesses. I've seen that there are some very clear steps that you can take that will move things in the right direction most of the time. And I've also seen that when you make the wrong decisions, oftentimes it will move things even faster in the wrong direction. And I want to share what you can do if you're in a situation where your company stops growing. And for the record, if you think to yourself, I'm never going to be there. If you think only CEOs who make the wrong decisions get there. If you think that this is not something that happens to every single business out there, you're wrong. This happens to everyone. And if you think you can never be there, then this podcast is even more important for you to listen to. Because when that time happens, when you see the things start happening to you that have happened to every business out there, even major corporations out there have years where things go backwards, have years where sales go down, have catastrophes, pandemics, issues that come up where where their numbers is going the wrong direction. And so every one of us can get there. I want to help you if you ever find yourself in this situation.
I'm Alex Charfen and this is the Momentum podcast made for empire builders, game changers, trailblazers, shot takers, record breakers, world makers and creators of all kinds. Those among us who can't turn it off and don't know why anyone would want to. We challenge complacency, destroy apathy, and we are obsessed with creating momentum so we can roll over bureaucracy and make our greatest contribution. Sure,we pay attention to their rules, but only so that we can bend them, break them, then rewrite them around our own will. We don't accept our destiny. We define it. We don't understand defeat because you only lose if you stop and we don't know how. While the rest of the world strives for average and clings desperately to the status quo, we are the minority, the few who are willing to hallucinate there could be a better future. And instead of just daydreaming of what could be, we endure the vulnerability and exposure it takes to make it real. We are the evolutionary hunters, clearly the most important people in the world, because entrepreneurs are the only source of consistent, positive human evolution. And we always will be.
One of the toughest conditions to navigate in a business, like I said in the intro, is when numbers go in the wrong direction. When there is an issue in a business that causes you to stop burrowing and start going backwards. Your numbers come down and you start losing money. And this can happen for a number of reasons right now in the online space. There are a ton of businesses that did exceptionally well through COVID, through lockdowns, through 2020 and 2021, and some even had some hangover of doing pretty well in 2022. They've come down in the last 6 to 12 months and in the latter half of 2022 and 2023, and their numbers have come down and they stopped making money or they started losing money. There are financial issues that can have you start losing money. If you have an advertising channel that turns around all of a sudden, like when the iOS update happened a few years ago, tons of online businesses started losing money. You can have a channel that goes away. I can't tell you how many businesses I've known that have had their ad accounts shut down at Facebook or at Google and have had a hard time getting that open back up and have lost their ability to generate revenue. And there are a ton of different reasons why this could happen now. When I'm talking about the solutions that I'm going to share with you, I'm talking about solutions for a condition that is ongoing. I'm not talking about the temporary loss of money, and there's a lot of reasons why you might temporarily lose money, you know, for a month or for two months. Like you have a tax bill that was unanticipated or taxes were reported incorrectly. So you lose money for a couple of months or there's a major repair or acquisition you have to make in a business. So you lose money for a couple of months. Those are the types of things, those temporary things that you can see the beginning, you can see the end. You know, it's a one time thing. That's not what I'm talking about today.
What I'm talking about today is when your numbers start coming backwards, there's not a clear path to fix it, and you need to start making some changes in the business. And you should start making changes way sooner than you think you need to. And I want to share with you the issues that I've seen, the challenges that I've seen with CEOs who get into this situation and help you stay out of making the wrong decisions and being far too optimistic. And so when I say I want to share with you the challenges I've seen in the situation, I just kind of alluded to one of them. So, number one, as visionary entrepreneurs, we are far too optimistic. When things go in the wrong direction. We start, we're optimistic rather than realistic. We don't look at our numbers. We don't really understand the facts of what's going on. And we keep thinking that something somewhere is going to change this. By the way, I know this intimately because I've done it. I've run a business that has lost money and that had to lay people off, that had to make significant changes in how we were spending our money and how we were running our business. And I made every mistake I'm going to share with you today. So the mistakes I see are one: being far too optimistic; two: waiting too long to make cuts; three: not cutting hard enough, not cutting enough out of the business; and four: not really understanding where you stand as far as your numbers. And so let me give you the solutions and how you should approach a situation like this.
If you run into a place where your business is making as much money. And I'll also share along the way where I've made some major mistakes here. I feel like a lot of the times when I'm sharing a lesson, when I'm sharing a solution, when I'm sharing a coaching moment with someone, it's because I've made the mistake in the past. I've watched others make the mistake in the past. I want to help you. I want to prevent you from making this mistake. And so let's start with the last thing that I mentioned. So the first thing you need to do when you're in a position where your business starts losing money is you absolutely have to know your numbers. And the most important number to know are the most important set of numbers, you know, is to calculate your runway. Runway is how much time do you have left, given how much cash you have in the bank. So if you're in a situation where you have $100,000 in the bank and you're losing $10,000 a month, and for the foreseeable future, it's going to continue to be $10,000 a month. You have ten months of runway. 100,000 divided by ten months, ten months of runway. If you're in a situation where you're losing more money on a monthly basis, you've lost 8000, then 10,000, then 20,000. While you take that last month, not an average of the prior three months and years that for you runway. So if you had $100 in the bank and you lost 20,000, you'd only have five months. Anything under six months, you are in an emergency situation. And any time your business is losing money, it should be treated as though you're in an emergency situation. Because again, as entrepreneurs, we are far too optimistic. And so getting that number down on paper and this isn't in your head, this is getting the number down on paper, looking at what were your losses for the last month. How much money do you have in the bank and how many months of runway does that give you to correct the situation? And you should be tracking this on a monthly basis every month. You should know the new runway calculation based on the prior month's losses. And you should be conservative and and really look at those numbers every single month to know how many months you have left. And again, under six months, you're in an emergency. You should be making changes. You should be making cuts. You should be looking at what you do because you're in an emergency situation. And if you get to zero and you have no money left in. Then there are no decisions to make and things get really challenging at that point. You're filing bankruptcy. You might be filing personal bankruptcy, business bankruptcy. You might have creditors that are going to have challenges. I want to see your business continue. And so first, the first thing you do is look at your runway and understand it every month.
The second thing to do is to analyze every expense you have and ask if it's absolutely vital for where the company is right now. You know, I've worked with a lot of companies that in 2020 and 2021 had huge growth years. They had some growth in the beginning in 2022, and then things started to fall off and they've been challenged for the last year. Right now we're in June of 2023, So about the last year has been challenging for them. And what a lot of them have done is during those 2020 and 2021, they had so much money coming in, they actually spent more money. In fact, several of them that I've worked with took that terrible accountant's advice at the end of the year where the accountant says, ‘Hey, you made too much money this year. Go out and spend a bunch of money’. And they spent money on office furniture or cars or equipment or things that they didn't really need. They outfitted studios, they spent money that today they regret spending. So if your accountant ever comes to you at the end of the year and says you should go spend as much money as you can because you made too much money. Just remember, you should spend money on what you need. Not money gratuitously. Not deciding to build a studio, not deciding to put in a whole bunch of new office furniture that you don't need. You should always spend money on what you need regardless of what your accountant says at the end of the year. And so sorry, I'm coaching within coaching. That one always gets me. So I wanted to make sure I shared it with you just because I mentioned it. But when you're in this place where you're losing money, you analyze all expenses and make sure you understand every single expense. And if it's vital to the company right now, if it's something you can do without, if it's a perk, if it's something that makes things more comfortable, it's something that makes things more fun. When you're losing money is not the time to have those things in a business. So analyze every expense.
And then the third thing you do is you make cuts. You cut expenses that are non personnel related. And then I know it's painful, but you cut expenses that are personnel related. And there's two paths that you can go down when you start making cuts. So the first path is you can cut enough so that the business is profitable and the business is safe. And so the business is making money. So you're losing $10,000 a month, you cut $15,000 a month and then you get back to the right side in the business. The second path you can take is to cut $5,000 a month and hope you can make up the difference. I'm using round numbers. The businesses I've been working with are dealing with much larger numbers than that. But here's what I want you to know about these two cuts. See, financial pressure on a business is like pressure on anything. It causes pressure. It holds things in place, it makes things hard, it makes things difficult, and it clouds our decision making. It makes it hard to understand what to do next. And in my experience, the companies that cut to where they're safe, the companies that cut enough so that they get back to profitability immediately are the ones who survive more often, are the ones who go on to create more profitability in the future. Even though sometimes those cuts hurt, even though that means that sometimes the people in the business have to start taking on more responsibility, even though sometimes it means the visionary, the the person running the business, the CEO of the business has to take on more responsibility and start doing some things that they haven't done in a while. Those are typically the businesses that go on to be successful. And this is just after 30 years of watching patterns and seeing what happens. On the other hand, the businesses that don't cut enough or don't cut enough to profitability, that the entrepreneurs are optimistic. Like, you know, while we're losing $100,000 a month, I'm going to cut $75,000 in expenses and we'll make up to 25,000. Those are the ones where they hang on to that financial pressure that keeps too much of that financial pressure. And they oftentimes have a really hard time growing.
So when you're looking at this, this decision making, my suggestion would be you cut to where you're actually making money, because here's where I can see in almost all cases, including mine: When our company started losing money, I didn't cut enough. I should have cut harder. I should have cut faster. I should have made one huge cut that got us to the place where we needed to be. And instead I ended up doing three different cuts. That means three different cleanup expenses, three different layoffs, three different really painful periods that the team felt, that I felt. And we had a really hard time recovering. I wish that I could go back to that beginning. And, you know, I've learned from everything that I've ever done, but if I could do it over, I would go back to the beginning and cut way more and get all of the pressure off the business. Even though it would have been uncomfortable for the people that were left, even though it would have been uncomfortable for me because I'd be doing things that I hadn't done in a while, it would have been so much better than the death of a thousand paper cuts and making one cut, then another cut, then another cut. It's just brutal. And if you've never been through this, this is why I'm sharing this with you. Because if you're in this situation now, like so many businesses are, or if you get in this situation in the future, I want you to remember this. When we relieve pressure on a business, oftentimes that's what the business needs to be able to grow. And when we leave too much pressure on a business, we create constraint, we create congestion, we create frustration, we create anxiety, and it holds the business in place. And so if you're in a place where your business isn't making money, calculate your run rate and know your numbers. Look at every single expense and cut everything you can, whether it's software, whether it's services, whether it's people within the business. I know it's painful. Make the cuts and you can go one of two ways. Cut to where you're profitable or cut to where you might be able to catch up. My suggestion would be cut to where you're profitable. In my experience, those are the businesses that go on to be successful long term. And then once you're past this challenging situation, build up a reserve fund of 6 to 12 months. 6 to 12 months cash that you have. So if anything in your business ever happens again, you never get to that place where you only have a few months left. If you're within six months, you're in a challenging situation. I always want to have way more than that in cash and runway. So I know that our business can survive. If you get down to the 90 days and then you get down to 60 days and 30 days when you're in that last 30 days, and I've watched too many business owners go through this, there's a lot fewer decisions you can make. There's way more pressure to make decisions under an emergency situation that now is truly an emergency because you're going to end up not being able to pay bills, can challenge you financially and it can challenge the ability for you to run a business, to grow that business, to get that business back to where it's actually making money.
This is one of those things it's uncomfortable to talk about, but I've just watched almost every person I've ever known who's run businesses go through this at one period or another. And like me, so many of us make the mistake of not cutting hard enough, not cutting fast enough, and letting optimism overrule reality. And I never want to see you do that. If you are in a place where you want to start growing your business faster, you want some predictable systems that will help you do that. You should take a look at our membership. We run a company called Simple Operations and we help visionary entrepreneurs, hire a team, grow businesses predictably without feeling like they have to do it all themselves. And we show you the process, structure and routine to help you grow the business and have every person on your team be fully utilized, know their outcomes and understand exactly what's going on so that you can grow fast, you can go profitably and you can go in the right direction. Go to simpleoperations.com, sign up for a call with my team. We'd love to talk to you about coming into our membership, where we routinely help businesses go from 7 to 8 figures and for an eight to multiple eight figures, we've got a huge track record of doing this with some of the most successful entrepreneurs out there and we'd love to talk to you. Simple operations.com. We look forward to hearing from you and thanks for listening to the podcast. I appreciate you.