Failure is an option

guest commentary by David Potts

Is there a “right” time to shut the doors of your business? For many business owners the answer is made for them, when they have no other option. It is when an IRS collection officer, or maybe even a more friendly face, their banker, shows up and seizes their company’s assets.

Afterwards, demonstrating perfect hindsight, the defeated business owner recognizes he should have closed the business earlier, usually a lot earlier.

The first hint that your business is headed for trouble is, as you would expect, when your business is losing money, continually. If your business is continually losing money you have three choices: close the business, continue to lose money until the business is insolvent, or turn the business around by making the business profitable again. Of course business owners, being a determined and competitive tribe of people, always believe they can and will return their businesses to profitability.

One of the fundamentals of business management is that a successful business requires a current, up to date, and complete accounting system that provides the owners with accurate financial statements to manage their business operations profitably. Without accurate financial statements a business owner can’t quickly determine if he is making or losing money.

The sad fact that there are hundreds of business owners in the Greater Fort Smith Region who operate their business blindfolded because they don’t have accurate financial statements provided to them on a timely basis. The consequence is that their business could be losing money and they don’t know this until months later when their cash balances dry up. (Acid test: If you use Quickbooks, run your balance sheet. If you have a large balance in the account titled “Open Equity Balance”, then there is a high probability that your financial statements are not accurate.)

Even if you are one of the unfortunate souls who operate blind and try to manage your business without accurate financial statements, there are other hints that your business might be headed for trouble. Well, not hints. Let’s call them bright flashing signs.

If a business is continually losing money, eventually it can’t pay its bills on time. At first this might be blamed on slow collections from customers or high but temporary levels of inventory. After a few weeks, to take the pressure off, the business owner will go to the bank to borrow money. If business continues its bad streak, after a couple of months he might have to go to the bank again. Soon the death march begins. Eventually the bank will deny the business owner additional loans. This makes the choices of who should get paid first a bit harder, but that’s OK, it is just a matter of time until things turn around.

They just have to work harder and “believe” harder. The business owner has to pay the employees first or they won’t show up for work.  By now many of his vendors are placing him on COD and the banks have converted the terms of their notes to paying interest only in hopes of helping the business succeed. Although the business owner doesn’t want to do it, he will have to be late in paying his sales tax he collected from his customers or the social security taxes and federal tax withholdings he withheld from his employees’ wages.

The IRS won’t know the payment is late until after the company files the quarterly employment tax returns and then it will take at least a month or more before the IRS sends a demand for payment. Then the business owner can put off paying the delinquent taxes for at least 90 more days as long as they tell the IRS the can pay the employment taxes by then.

“Surely by then their business will have turned around,” the business owner keeps telling himself.

But business doesn’t improve and the past due balances of their taxes continue to climb. That’s the only way they can fund the business’ continuing losses.

There is one thing I have noticed about an Internal Revenue Officer, aka, the tax collector. They never smile at you when they introduce themselves. As a matter of fact, I’ve never even seen one tear up when the business owner confides to them the stress they are under from managing the business and this stress is so bad that it causes frequent fights at home with the spouse ruining any hope of a sex life.

They have heard it all before, probably with more drama than you could muster. And don’t believe Roni Deutch’s television ads. Seldom will the IRS settle your past due tax liability for pennies on the dollar. The tax collector that just introduced himself to you wants to know only one thing. Can you pay your past due tax liability, and if so, when? If you can’t, they will levy your bank account, place liens on or seize your company’s assets, and let you pay the remaining balance monthly for the next 10 years with the earnings from your next job. At this point you will be a modern day slave in service to the United States Treasury.

I have seen the progression of events described above over and over again during the past 25 years I have practiced as a CPA. In actuality this progression of events can take several years. The business owners I know who have marched this death march would have closed their businesses much sooner if they would have known just how deep the financial pit they dug for themselves would be. But when you are in the midst of a fight for survival, belief is powerful motivation to stay the path. But belief doesn’t turn a business around. Profit does.

If your business is somewhere on the path described above, and I know many businesses are, you need to ask yourself, “Is it time to close my business?” Nobody can make this call but you. Business owners that have traveled this path to the end would tell you sooner is better than later.

Just keep in mind, failure IS an option, and is always an option in any business. But as Zig Ziglar said, “Failure is an event, not a condition.” Closing an unprofitable business isn’t the end of life. For some it might even be the beginning of a real life.

About Potts
David Potts is a certified public accountant also accredited in business valuation. Owner of Potts & Company, Certified Public Accountants for more than 25 years, his practice focuses on small and medium size businesses and their owners in the areas of taxation, accounting and bookkeeping, business valuation and business advisory services. He is a Fort Smith native and a graduate of the University of Arkansas. You can follow more of his thoughts at ThePottsReport.com. Although every effort is made to provide you accurate and timely tax information, it is general in nature and not specific to your facts and circumstances. Consult a qualified tax professional to discuss your particular case.

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