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Oftentimes, it is easy to see why some businesses fail: they may fail to develop a positive reputation in the community, they may be unable to attract sufficient new customers to justify their existence, they may drive away repeat business by neglecting current customers, and the list could go on. What are not as obvious are the circumstances under which a seemingly thriving business may fail. Frequently, the telltale signs of a troubled business go unnoticed because these same signs are evident in a thriving business. How then can you tell whether your business is troubled or thriving? Answer these questions:

1. Are you at the point of needing to turn away potential clients because you are too busy?
   
2. Are you at the point of needing to turn away new business from existing clients because you are too busy?
   
3. Do you find that you are losing your ability to focus on the matter at hand because of the multitude of other matters pressing for your attention?
   
4. Are your resources, financial and otherwise, stretched to the maximum?
   
5. Are you incurring an increasing amount of debt in order to support current operations?

If you answered yes to all or most of the above questions, you run the risk of having a troubled business. The troubled business that externally appears to be doing well can be distinguished from the thriving business because of four characteristics that are usually present:

1. Excessive use of debt.
   
2. Inadequate liquidity.
   
3. Poor capital and human resource planning to support current operations.
   
4. Lack of sufficient capital and human resources to support growth.

Outwardly, troubled businesses can appear healthy. They may experience an abundance of business, an increased workload, and additional hiring, for example. Inwardly, however, the business may be fraught with disorganization and chaos. As an example, consider the following scenario:

Trendy Restaurant is opened with much fanfare. Interest in the community is high. The food is exceptional. Lunch and dinner times are always crowded with waits for dining ranging from 30 minutes to 2 hours. After a few attempts to patronize the restaurant, many potential lunch patrons refuse to consider dining there because their work schedule cannot accommodate such a consistently long wait. Many dinner patrons complain that their dining experience feels rushed, the dining environment cramped, and the wait staff inattentive and impatient. After a time of operation, patronage dwindles. Those who would have considered dining there, but for the long wait, no longer want to patronize the restaurant because of concern that something now must be wrong. Why else would such a successful, high demand restaurant lose their patrons? It is not long before Trendy Restaurant closes its doors-this time with no fanfare.

Just as bad times can kill a good business, good times can kill a bad business. The lack of in depth, proactive planning, combined with insufficient cash, capital, and human resources to support both current operations and growth, spelled disaster from the very beginning. It was only a matter of time before the good times that sustained the poorly operated business exhausted the life out of it. The business could not carry the momentum it set into motion.

Troubled businesses frequently make the same mistakes:

1. They carry out a new idea with insufficient upfront thought regarding the fit, the costs, the time to develop, or the lifetime of the activity;
   
2. They are unable to sustain the momentum they have created; and
   
3. There is no back up plan.

These mistakes are the result of leadership's lack of vision and poor or no planning. Troubled businesses frequently do not see what is coming ahead because they do not know where they are relative to what is coming at them. Consequently, troubled businesses often are reactionary and have a course set by external stimuli rather than by internal determination. They may be able to exploit an opportunity, or capitalize on, or leverage market events. However, they are unable to sustain their gains or maintain their position because they cannot weather the storms that come their way. Troubled businesses have difficulty in creating an anchor and developing a plan for performance that can support the company during downturns.

Thriving businesses, on the other hand, may be burgeoning and bursting at the seams, yet they do so in a calculated and controlled manner. They effect this controlled environment by maintaining an internal compass so they know where they are at all times. They also have a barometer to assist them in determining how they are doing. Control becomes the anchor by which the chosen direction is focused and aimed at an objective. Winds may blow and stormy times may arise, but thriving businesses understand and appreciate the process that they must engage in order to weather through the difficult times. This process has four stages: Vision, Planning and Preparation, Execution, and Measurement.

Vision

You have certainly heard the phrase, "If you can't see it, you won't achieve it." This simple, yet profound statement speaks to the obvious point that you have to take the time to think about what you want to do and whether, in your mind, you believe yourself to be capable of successfully accomplishing the endeavor. Make sure you write down what you want to do. Studies have shown that you are more apt to set out and do what you want when you first write it down. The purpose of this article is not to address the vision stage in detail; however, it cannot be stressed enough that this stage must not be bypassed.

Planning and Preparation

Planning and preparation are two critical steps that cannot be given short shrift by leadership. There should be no short cuts at this stage. After you have taken time to think about what you want to do and have written it down, take time to develop and write the plan. This plan should be detailed, stating how and when you expect to accomplish it. Quantify the cost, determine how you will finance the endeavor, consider how you expect to market to and provide service to your clients. This planning and preparation phase may seem tedious, yet this is the phase that will prepare the business for the many storms that may arise in the future. While there are examples of successful people who "flew by the seat of their pants," or operated on "gut instinct," most of them had an internal Geiger counter, if you will, to alert them to upcoming dangers. There may be a place for gut instinct, but do not mistake fuzziness for gut instinct. Risk is not okay; calculated risk is.

Execution

If you don't follow the plan, what good is it? A plan is only as good as the commitment to follow it. The plan is the anchor by which the business is stabilized. Execution is about implementation and management. In the case of a business seeking growth, execution requires the management of growth. Uncontrolled growth can be deadly. Not only can the business be lost, the professional reputation of the owners can suffer as well. As a case in point, it is well documented that more malpractice actions are brought against attorneys for failure to devote sufficient time to a matter, failure to devote resources to develop competence in the matter, and neglecting the client matter altogether. These are planning and execution issues. Planning for client matters requires making decisions before any case is accepted, in what areas one expects to practice and gain competence, what practice areas to avoid, and how resources are to be allocated. Execution requires sticking to the plan, not being bedazzled by the latest and the greatest practice trend, and following through on client matters by exploiting the financial, human, and capital resources necessary to complete the matter.

Measurement

How does a business know how well it has done? It has to first know where it has been and then determine which direction it is going. Historical measurements of financial performance can be tracked through the use of the income statement and balance sheet. However, these statements focus on financial condition and do not provide information regarding the financial viability of the business. Determining the financial viability of a business requires a review of the actual inflows and outflows of cash. This is because viability asks the question of whether a business can pay its debts when due.

Businesses should strive to have and maintain a positive cash balance. Weekly review of the cash balance should be done so that steps can be taken quickly to keep the net flow positive and the amount steady. Cash flow is the linchpin under girding the resources of the business. This cash balance information facilitates budgeting and makes clear the relationship of cash to short term and long term operational issues facing the business.

It is very possible for a business to have a strong income statement and appear thriving and yet not have sufficient cash to support its current operations. Oftentimes a business in high growth mode will have a strong income statement because of the increased amount of revenue. However, the balance sheet will be relatively weak because the amount of revenue is outpacing the net worth of the business. The higher the ratio of revenue is to net worth, the riskier the business. This is because a business that is expanding and growing is consuming working capital faster than it can be replenished. The business often resorts to debt in order to finance this growth. Life is good until the business encounters a bump in the road. Because the business is consuming faster than it can save, any little bump or hiccup can spell disaster for the business. If the business had a cash balance information system in place, it would not have been fooled by its high profits. It would have seen the high burn rate of its cash and taken steps to either generate more cash or scale back revenue-generating activities.

A cash balance information system starts with an understanding of the cash-to-cash operating cycle of the business. The cash-to-cash operating cycle represents the time between outflows and inflows related to the revenue-generating activities. In the legal profession, there is typically a lag between the outflow of cash for payroll, equipment maintenance, supplies, etc., and the inflow of cash from clients. Thus, the first step in calculating the cash-to-cash cycle is to consider the projects undertaken and determine the average amount of time in days that it takes employees to finish the work product and present it to the client. Next, determine the average number of days it takes to collect on accounts receivable (assuming the money was not collected up front). Third, determine the average time from utilizing labor and acquiring supplies, equipment, etc., and paying for them. Add the days determined in steps 1 and 2 and subtract the days determined in step 3. The resulting number of days is the cash-to-cash cycle. This represents the number of days in which the business must arrange for financing to cover a cash deficiency related to these projects. Accordingly, thought must be given as to how cash is to be generated for the business during the lag times -- revenue from other clients, loan, equity, or a combination of the three. Thought must also be given to the seasonalities of the practice. Individual practice areas may exhibit a pattern of lulls and swells in revenue generation. Consideration should be given to vacation time, sick time, and other personal matters that impact the timing and handling of client matters.

When a business is thriving, short-term cash deficiencies may not be problematic. This is because they have resources sufficient to weather the storm. Additionally, vendors may be more flexible in deferring payments due because of the financial strength of the business. However, in troubled businesses, these short-term cash deficiencies threaten their very existence because they are operating under severely limited resources. Vendors may not be as sympathetic to the plight of the troubled business out of fear that they may not get paid. Troubled businesses are usually stretched to the limit and accordingly, should have cash flows monitored closely and frequently. Cash disbursements should be timed as much as possible to cash receipts in order to curtail the need for short-term financing arrangements.

Once the cash-to-cash cycle is determined, steps can be taken to reduce the number of days in the cycle. Such a reduction will free up cash quicker. There are three areas in which this cycle can be reduced.

1. Find ways to allow employees to work more effectively and efficiently so that client matters are handled quickly.
   a. Ensure that systems are in place to streamline production of the work product-checklists, prepared questionnaires,     form files, training sessions, etc., are excellent in this regard.
   b. Ensure that employees have the resources they need to do a good job.
       i. Quiet work environment
       ii. Adequate supplies and research materials
       iii. Adequate support staff
       iv. Decent compensation system and benefits
2. Accelerate collections of accounts receivables.
   a. Allow clients to charge on their credit cards for your services.
   b. Watch for "paid in full" checks.
   c. Outsource collections.
   d. Weed out clients who do not pay or who are slow payers.
   e. Try to get paid up front for all or most of the work.
   f. Consider timing the receipt of your bill with the client getting paid from its customers.
   g. Refine billing system
       i. Review work in process and billing reports regularly to ensure proper billing of clients and ensure time and expenses        recorded for client work is accounted for in the work in process report.
       ii. Bill regularly rather than all at once at the end of the project
       iii. Determine the best billing increment for billing time -- quarter hour, tenth of an hour, etc.
       iv. Standardize invoicing and collections.
3. Reduce cost related to payables.
   a. Use fewer vendors
   b. Use credit cards and pay off following month
   c. Ask for concessions from vendors
   d. Monitor for duplicate payments
   e. Use check preparation software
   f. Use due date tracking system to prevent late fees

Proactive planning and close monitoring of the cash flow can effect a healthy bottom line for any business. A business that sets these two things in motion will be able to see the storm coming early enough in order to take appropriate action.