It is Arithmetic Folks, Do the Math... Again. What Choice Do You Have?

I talk to small business owners all the time who ponder whether or not they want to do a workout and eliminate their debt on the business as well as reduce the debt on their personal guaranty to affordable losses. Unfortunately, most choose to wait and see what will happen, preferring self annihilation to survival and emergence.

I was recently reminded however that the decision must be based on...arithmetic. I was sitting at a lawyers conference table, with banker, lawyer and myself, discussing a workout scenario for a client that would cost the bank over a million dollars in losses, with a proposed payoff of approximately $75,000.

The banker was whining about the bad faith of the borrower, his poor management skills and exclaiming wonder as to why we would be asking her to 'work with us' when we were acting so inappropriately with the bank? I responded as clearly as possible the good intent of the borrower and the fact that our plan was all about creating the best scenario possible for the bank despite the large losses likely to be experienced.

The lawyer piped in with a retort, interrupting the banker's emotional rebuke stating, "We will make our minds up based on the math. Whatever yields the best return is exactly what we will do," he said. The bank of course could liquidate by foreclosure auction and sweep the accounts for the cash that remained. It is the Christmas season and sales were brisker than usual.

How articulate, how correct the bank lawyer was and a lesson everyone must grasp immediately.

You all took out loans based upon revenue levels capable of supporting the debt. That has changed, the revenue levels have plummeted and you must respond. Any analysis will demonstrate whether or not your business can absorb the reduction of revenue and still be profitable while servicing your debt. Most businesses cannot absorb this discrepancy... yet most business owners plow onwards, absorbing losses, working through retained earnings, wasting cash and opportunity, because they either do not believe the math... or simply are not doing the math, or are ignoring the math.

The banks lawyer got it right. We can all take a lesson from him.

Do the math; there is no other way to make business decisions. Once you conclude that it is only a matter of time before you will be out of business, you must act. Downsize and do a debt workout reducing your debt load to where the business can afford to operate... profitably. Do this as soon as possible before all your cash is wasted supporting unsupportable debt service.

What choice do you have? Do the math, and then act. The bank will and so you must.