14 Aug 7 Steps to Overcome Financial Distress and Rebuild Your Business
A pile of bills.
A lack of cash flow.
A looming sense of uncertainty.
It’s easy to feel overwhelmed when your business hits a rough patch.
But financial distress can be the beginning of a strategic rebuild for your business. You have to be willing to take a hard look at the numbers, reassess your strategy, and commit to your plan, but recovery is absolutely possible. These seven steps will show you how.
Step 1: Diagnose the Problems
The first and most important step is recognizing you’re in financial trouble. That might sound obvious, but many business owners downplay the signs until they’re too deep to climb out easily. Be honest with yourself about your current situation. This step is about gaining clarity.
The root of your financial distress can be broadly grouped into one of four areas: handling finances, managing operations, responding to the market, or leading your company. Start by identifying your struggling area, and use questions, like those provided, to specifically identify what triggered your financial distress.
Handling Finances
- Is your business carrying too much debt?
- Have rising expenses outpaced your revenue growth?
- Are your cash reserves depleted?
- Have you delayed invoicing or collecting payments?
- Are your financial records inaccurate or disorganized?
- Are you operating without financial strategies like budgets, market forecasts, or business growth plans?
Managing Operations
- Are you heavily relying on one client, product, service, or market for revenue?
- Does your business monitor and limit its waste?
- Are you overpaying for labor or products?
- Have you allocated your resources effectively?
- Are you holding on to too much inventory, or frequently selling out?
- Have you overextended your operating costs?
Responding to the Market
- Have you experienced a sharp drop in sales?
- Has demand for your products or services declined?
- Is inflation ballooning your costs?
- Are you competing with new businesses?
Leading Your Company
- Have you marketed your business to the right customers?
- Are you ensuring compliance with policies, industry standards, government regulations, and laws?
- Is your offering profitable enough to support your business?
- Are you struggling to retain or hire good employees?
- Do you or a single leader in your company make all strategic plans and business decisions?
In addition to this evaluation, review your financial statements and consult with an accountant or advisor. The more clearly you understand the root causes, especially if they combine factors, the more effectively you can fix them.
Step 2: Prioritize and Stabilize Cash Flow
Even if the root causes of your distress have little to do with money, cash flow is the lifeblood that will see you through your rough patch. Prioritizing ways to stabilize and improve your revenue will give you the time you need to recover.
Act fast to cut or delay non-essential expenses if your cash flow is inconsistent or barely covers your expenses. Revisit payment terms with your vendors, cancel unnecessary subscriptions, lease your equipment, automate processes, and tighten your operating costs. Consider a monthly budget you can afford and commit to staying within it.
At the same time, look for ways to boost revenue quickly. Offer a limited-time discount to increase sales. Promote high-margin products or services more aggressively. Every additional dollar helps buy you time and flexibility.
Alternative funding solutions could also give you access to capital without the red tape of traditional loans. Private business lenders have greater flexibility than banks and often offer greater support since they invest in your business. They offer options like merchant cash advances, business lines of credit, accounts receivable financing, equipment leasing, business bridge loans, and asset-based lending to help you stabilize your cash flow quickly.
Step 3: Talk to Creditors and Vendors Early
If you’re behind on payments or anticipate that you will be, don’t wait for creditors or suppliers to chase you down. Be proactive and reach out. Most vendors and lenders are more willing to work with you if you show transparency and a willingness to fix the situation. Your recovery benefits everyone more than your failure.
These conversations feel uncomfortable, but they’re necessary and productive. When you communicate, you show integrity. Your honesty during a rough patch can preserve critical relationships and buy time to overcome financial distress.
Step 4: Rebuild Your Business Model for Long-Term Strength
Now that you have stopped the bleeding, it’s time to rethink how your business operates. You don’t want to end up in the same position again. That means planning to address the problems you diagnosed in step one.
Pick one of the root causes of your distress to address. Consult with an advisor on options and make one change. Then, track your metrics weekly to see if your plan is working and to catch small issues before they snowball. Don’t be afraid to pivot your strategy and ask for advice multiple times if something isn’t working. Rebuilding your business plan for the long term will take careful effort and time.
Step 5: Evaluate Your Financing Options
Taking on new debt during a financial crisis might seem backward, but the right type of financing can help you turn things around. It’s all about choosing the option that aligns with your business’s needs and using the funds strategically.
You could improve your existing debt with financing. If you are in default or bankruptcy, selling your distressed debt to private creditors would secure access to capital and relieve your immediate burden. If you want to consolidate existing debt, loan refinancing reduces your monthly obligations and simplifies your financial management. Talk to your current lender about restructuring and look to other reputable lenders for helpful options.
Other financing options focus on providing funds to help you out of your rough spot. You could leverage your resources with asset-based lending or equipment leasing. These options increase your cash flow and can lower your operating costs. Review step two for more funding options.
Use the funds to support your business plan, not just plug holes. A loan will not be the answer to your financial distress. Strategically secure financing that moves your company toward recovery by lessening debt load, lowering costs, or increasing revenue.
Step 6: Surround Yourself with Support and Resources
Recovering from financial hardship can feel isolating, but you will be more successful working with others than doing it alone. Build a small team of trusted advisors and a support team you can rely on as your business recovers.
For your advising team, consider people who can help you make data-driven decisions and stay accountable. An accountant, a business coach, a mentor, a financial consultant, and a lender are all excellent options. Look for advisors experienced with business distress to guide you. Most importantly, work with professionals familiar with your financial situation and invested in your recovery.
Don’t forget about a personal support team. The pressure of business recovery is intense. Don’t underestimate the value of mental and emotional support from fellow business owners, family, friends, and mentors. Ask people how they have overcome similar challenges, so you stay motivated and learn from their experiences.
Step 7: Rebuild Gradually
We know moving past damage control is exciting, but be patient. You lay the groundwork for your long-term success or failure in the rebuild phase. Just like a hastily poured foundation of a house leads to bigger problems in the long run, rushing through this phase of recovery will eventually lead to greater financial problems than before.
Stick to your plan. Make payments on time and communicate with lenders frequently about your progress. Don’t overextend yourself with debt, contracts, employees, marketing, or inventory as you grow. Instead, reinvest in your business gradually. Put money into what’s working and continue monitoring your financials like a hawk.
Work with your team of advisors to set checkpoints and goals for your business to continue to evaluate your plan. Discuss how you will know your business has safely recovered, and celebrate reaching those goals as you move forward.
From Breakdown to Breakthrough
Financial distress is a tough reality most of us would rather ignore. But the truth is that countless entrepreneurs have stood in their financial ruins, exactly like you, and bounced back sharper, stronger, more focused, more intentional, and more successful. By taking the right steps and evolving your mindset with your business, you, too, will see your financial breakdown rebuilt into a thriving success.
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Infographic
When a business faces financial difficulties, it’s easy to feel overwhelmed; however, challenges can also mark the beginning of a strategic rebuild. This infographic outlines seven steps to recover from financial distress.
