Knowing When to Pull the Plug on Your Business

Being a small business owner, often times it is difficult to forecast if your business will be thriving.  With the economy in its current state of recession, many small business owners have been skeptical when it comes to the future success of their business.  After all, with giants like Bennigan’s, Boscov’s and Lowe’s shutting down numerous, if not all, locations, running your own business can be even more intimidating and stressful than ever before.

However, despite the state of the economy, other factors come into play.  You have to ask yourself two very important questions:  Is there a demand for my product or service, and can I really be successful in this location? 

If you see your business slipping, often times it is hard to tell yourself when to call it quits.  When is the right time?  With a few helpful signs and suggestions, you can pinpoint the most rational time to pull the plug on your business.

1.      You are using personal credit cards to support your business.

It is evident that if you are using personal credit cards, your business is not making enough money to maintain itself. Is it really worth it to put yourself in debt over your noticeably failing business?

2.      Assessing your success at the two year mark.

It is a struggle to get your business running, and if you are not making a profit by the end of your second year, you have a low chance of being successful. But, two years is just a rough estimate.  The assessment should be strongly based on the type of business.  Whether it be a business that depends on time consuming relation building, or if it is a product or service that nobody wants.  Also, there are some factors to take into account, such as the state of the economy.  Although we are in a state of recession, it could be worth it to stick it out until the economy strengthens.  However, it is up to you, as the owner of the business, to make the judgment call, especially if you are breaking even. Break-even occurs when your revenues equal your expenses.  In case you are unfamiliar with the term, here is an example:

      You open up a pizzeria and you want to know how much money you need to generate in revenues, in order to break-even.

                                 Total variable costs

                              + Total fixed costs

                              = Revenue needed to pay all expenses (break-even)

      Variable costs – expenses that depend on the number of customers you serve (example:  food).

      Fixed costs – these expenses are not dependent on the number of customers you serve  (example: rent).

      Revenue – money you receive from making a sale.

If your expenses exceed your revenues, the business may be in trouble.

3.      Your debts exceed your assets.

If your debts, or liabilities, exceed your assets, then you will obviously not make a profit. Simply put, if you are having trouble meeting your monthly obligations, get out!

Evaluating your overhead can help you decide just how feasible it is to stay in business.  This should actually be done, along with a break-even analysis, before starting the business.  Overhead consists of expenses that are necessary to the continued functioning of your business.  With your projection of overhead, you can estimate how much revenue you will need to put toward your expenses and maintain your business.  Break-even analysis is very similar to the example shown above.  The above example is good if you are in such a position where you are only worried about paying all of your expenses.  If you are running a break-even analysis before opening your business, it would be wise to add in your desired profit. Here is an example:

                                 Total variable costs

                              + Total fixed costs

                              + Desired profit

                              = Break-even point

Divide your break-even by your anticipated number of customers to get the average revenue needed per customer. Both break-even and overhead assessment are helpful ways of determining the likelihood of success.

4.      You have a large decrease in sales.

If you have a large decrease in sales and can not figure out what the problem is, you are in trouble.  Determining factors could be the economy, cost or dis-satisfaction. It could be one thing, or many, that is causing a setback, but if you can not figure it out, you may want to shut down your business. Problems take time to fix as it is, and time is money!

5.      No Product Demand.

If there is no demand for your product or service, your venture may be pointless. It could be that you are not marketing yourself properly, so depending on the shape of your business, you may want to try some new techniques. Assess how much implementing new changes will cost and make your decision from there. But overall, if there is no demand, you have no customer base. Unless you have the time, and more importantly the money, to invest in a new product line or service, you are out of luck!

6.      You have numerous sunk costs.

If you are not already familiar with the term, sunk costs represent money that is spent, but not likely to provide any kind of return.  Suppose you invested money into a new product line that never took off.  How about the money that was paid for an advertisement that did not manage to increase the customer base? These are examples of sunk costs.  It is easy to incur sunk costs if you are not careful where you invest your money.  It is important to do extensive research in order to decide whether the extra cost is beneficial.

There is a direct correlation between business failure and lack of research. Doing plenty of research can help you figure out where there is a high demand for your product or service. Make sure to run a break-even analysis or at least come up with a projection of your overhead. Making a business plan in order to know what to expect is also a sensible idea. Using good judgment and thinking about all possibilities when making decisions is imperative to the life of your business.