How to tell when it's time to give up your business

The great American dream is to build and operate one's own business. Nobody likes to admit failure when things do not go as planned. However, one of the most important elements of assuming the entrepreneurial role is to know when to go full steam ahead, when to take calculated risks, and knowing when to continue or not continue with the endeavor.

What are some signs that the closely held business owner is throwing good assets (cash frequently) after a bad idea or endeavor? These signs can be both tangible and intangible.

1. Cash flow is critical. You can have profit, but no cash flow with which to pay payroll, bills, or other indebtedness. How can you have profit with no cash flow? Very easy when sales are greater than expenses, and the sales revenues are tied up in slow or non-paying accounts receivable, or when all available cash is used to cover debt service. Failure to promptly pay trade creditors causes credit ratings to slip, makes working capital lines of credit difficult to get, or cuts off materials and services or requires COD. If the owner is constantly putting working capital into the business to cover operating expenses, using personal credit cards to cover costs or using payroll withholding trust taxes as operating cash, it is time to decide whether to continue the business. If operating cash outflow is less than operating cash inflow, the decision must not be put off but made quickly.

2. Indebtedness continues to grow. Every business needs to carefully analyze and decide how much debt financing and trade debt it can safely incur in relationship to liquid assets and available cash flow. If indebtedness continues to outpace liquid asset growth, especially when net equity assumes a deficit position, the owner must make the decision whether to continue the business.

3. Buying a job. A business owner should be paid for his or her time and effort plus a return on investment. If the owner is not getting paid because there is no cash flow (or profit), or is receiving minimum wage, why continue with the enterprise? The false hope that eventually things will get better can be a death sentence. Reality is what counts. Taking the risks of ownership, placing personal assets at risk, and paying everyone but you just to be able to say "I own my business" is pure economic folly. Do not simply buy yourself a low-paying job.

4. Profits generate cash flow. You can have profits but no cash flow. That can be the result of customers not paying receivables or because available cash is committed to debt service. However, you can not have cash flow without profits. Profits eventually turn themselves into cash flow. If there are no profits, or the business is merely breaking even, consider whether to continue the business. Be honest with yourself when conducting the analysis!

5. Time commitment and family time. The mental stress of having your own business can be tremendous and can wreak havoc with family relationships. As an owner, the buck stops with you. Time commitments, financial commitments, long hours and lack of free time, plus being the last one in the food chain to get paid, are often more than all but the most dedicated want to endure. Evaluate your morale, changes in personality, how you relate to family members, and whether you've lost hope and are losing sleep. These factors are equally as important as financial issues and frequently result from financial crisis.

Mental health is a concern and must be considered when deciding whether to continue the business.

6. Payroll withholding trust taxes. A strong indicator that it is possibly time to not continue is the use of payroll withholding trust taxes as operating working capital. This is fraught with personal peril. Do not go down this path! If this is the only way to stay afloat, it is time to shut the business down.

This list of considerations when deciding to continue or not to continue can go on and on. If faced with any of the above issues or similar concerns, contact a competent certified public accountant and business attorney to review alternatives and get unbiased guidance. It might turn out that closing your business will be less expensive, both financially and mentally, than continuing it.

L. Wallace Behrenz is a former FBI agent who now oversees business valuation and forensic accounting as a director of Meridian Business Advisors in Reno. Contact him at wbehrenz@mbareno.com.