Q: I launched a retail store about nine months ago, but I need immediate help. My business is losing several thousand dollars per month and I am not even drawing any salary for me or my family. My revenue has flattened out due to the economy and is around $40,000 per month, but my expenses are running around $46,000. I have an SBA loan payment of $6,600 per month and a building lease of $3,300 per month. I’m thinking about trying to refinance my SBA loan to get a lower payment. Any suggestions?
A: The first thing I would suggest is to get on your knees and pray because I have been in your shoes and I personally know that it is one of the most stressful situations a person can face. It is also a way that God sanctifies us, so I suggest reading James 1:1-12 for the constant reminder that God is refining you during this experience and that you are to be joyful through it all.
The second thing I would suggest is to realize that the only way out of your present situation is to be brutally honest with all of your business and family relationships (lender, building owner, suppliers, employees, and family) and to get them to all be part of the solution. Simply refinancing or renegotiating your loan payment will not be nearly sufficient enough to right the ship because your expenses are currently $46,000 per month and your loan payment is $6,600 per month (16.5% of Revenue). That means that even if you got the loan completely forgiven, you would only be at breakeven and still not able to draw a salary to pay for your family’s living expenses.
Because you said you have a retail operation, I will assume that you cannot really affect price or margin in any way on the goods themselves because you are re-selling products that you buy at market-based wholesale rates and sell at market-based retail rates. Therefore, the only way out of your situation is to raise Revenue and focus on cutting your indirect expenses, or overhead. Since this is an emergency situation, let’s start with the expense cutting.
I would suggest that you develop a plan of action and ask each constituent to contribute to the problem in a fair way and explain the plan to save the company. What you need to get to is an expense level of around $38,000 less an appropriate draw for you and your family. Let’s assume you need $3,000 per month for your family expenses. That means your expense rate needs to get down to $35,000. So now we have our target of $11,000 in expense reductions or 25% of the current $46,000. Your plan of action should be a reduction in the 25% – 30% range from each constituent (not all will agree to 25%, so it is best to ask for 30% and settle for what you can get.)
For example, you need to go to the lender and ask for a payment that is 30% lower or the lender faces the very real potential that you will not repay at all. This can best be accomplished by extending the loan term and/or lowering the interest rate in a refinanced loan.
Also, for example, you need to sit down with your salaried employees and explain the situation and ask them to take a temporary salary cut of 30% until the situation is better. You could potentially offer to merely defer their salary and pay them the variance once you have grown the stores revenue. Another tough question you need to ask is if you need all the employees you currently employ. If your revenue is lower than you had projected, perhaps you’ve over-hired and need to let some employees go. Either way, you need to upfront with all of them and explain the situation. This will be a very humbling experience.
Continue on down the line with all of your constituents including all of your distributors and suppliers. One word of caution on dealing with your distributors: they may end up putting you on a “cash in advance” payment basis due to the situation and if they do so, it will add even more stress to your cash flow issues. If at all possible, you would like to negotiate extended terms with them such as 60 or 90 days vs. the customary 30 days.
You will also need to sit down with your family and brainstorm ways to cut back on living expenses so your savings that you are burning through lasts you longer. This is also a very humbling experience for a family leader, but a maturing experience nonetheless and one that should draw your family closer together as they all participate in the solution.
You will also need to start managing cash very tightly on a daily basis to make sure you meet all necessary obligations to keep the lights on. If you have any one-time, non-recurring obligations that you have not yet paid, you may have to offer them 70 cents on the dollar or risk not being able to pay at all if the business fails.
In the midst of your cost cutting, I would suggest that you explore every avenue of growing store traffic and revenue. Explore all the creative, low-cost ways you can think of to drive more customers to your store. There are many ways to do this, depending on the type of retail operation you run. The bottom line is to be as creative and as diligent as possible to generate more sales with very little additional cost.
The combination of cutting expenses and raising revenue should eventually right the ship, but it may take a number of months. And, depending upon any potential seasonality, that could stretch out even further.
I pray that God richly blesses you and increases your faith during this time of trial.
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