Business busters - dealing with ten typical problems; includes tips for writing business plans and a list of resources - B.E. Special Report on Small Business - Cover Story

Black Enterprise, Nov, 1992 by Caryne Brown

Juliet C. Welker was on top of the world. One of six winners of Avon's Third Annual Women of Enterprise Awards in 1988, she had made Welker Real Estate the envy of every Philadelphia broker.

By early 1989, however, things had changed. The real estate market had slowed and the company's sales had dropped off significantly. Over four months, Welke(s commercial and residential business dropped 30%. Her monthly goal of 12to 15 closings came up short. Eight to 10 closings seemed more realistic. Even the average sale price of a property suffered, plunging from $118,000 to $104,500.

"Sales had been dropping off because the coun- try had been going into a recession. Then on top of the recession that was beginning, Philadelphia in- creased its transfer tax [sales tax on real estate sales]. At that time, the combination of city and state transfer taxes went from 4.07% to 5.07%," Welker says. To complicate matters, Welker hadn't paid attention to her income statements and didn't know about the slump, "It's embarrassing," Welker now says. "I literally forgot to watch. When I saw the equity account dwindling, I was utterly shocked. We were so caught up in our own success that I was almost ignoring the monthly report."

Had Welker been less solvent she could have gone out of business. She managed to turn things around by implementing cost controls and aggressively seeking new business. But not every business owner wakes up in time to avert disaster. Depending on which survey you read, 60% to 90% of small businesses fail. But if you stake out some business-survival territory in advance, you can avoid failure.

Here are 10 disasters an entrepreneur can face and clues to get past them.

1. Deadbeat customers. According to Nina Douglas at the American Collectors Association (ACA) in Minneapolis, about 232 million accounts were referred to third-party collection businesses in 1991. Bad debt costs the economy about $250 annually for every person in the country, ACA says.

Figures like these call for strong credit controls. A 30-day cycle for receivables is priority, says AI Harris, owner of Erik-A

Electronic Distributor Inc. in Monrovia, Calif. Erik-A is an electronic components wholesaler that sells items such as fuses, batteries and resistors to major manufacturers-- Hughes Aircraft Co., Northrop Corp. and Litton Industries among them. "There are a lot of companies that will stretch your receivables, Thirty days can become 90, and they still take the discount," he says. Harris routinely meets with the management of prospective trade customers before doing business with them. Building a relationship with clients discourages them from exploiting his billing cycle.

"In this time of recession everybody is trying to use everybody else's money," says Nelson Davis, producer of "MAKING IT: Minority Success Stories," a syndicated television show that profiles minority entrepreneurs. He's seen deadbeat trouble from the inside, too.

"There's a certain advertising agency I dealt with," Davis explains. "We were also doing business with their largest account. We knew that their account was paying them in a timely fashion, but they were not paying us in turn. So we changes vendors, you could sink.

Erik-A's 14-year survival and $4.1 million in annual sales owe a lot to Harris' aggressive bidding on government and corporate contracts. "The broadness of your customer base is vitally, vitally important," says CEO AI Harris, who boasts a mix of about 400 clients. "in order to stay in business for a long time, you have to be able to increase sales, especially during lean times."

Emma C. Chappell, founder, chairman and CEO of the black-owned United Bank of Philadelphia, agrees. In 30 years of banking, Chappell has seen business after business fail because they based their existence on a single contract.

Chappell recommends that a firm with one deal under its belt use it as a "leading contract" to get additional business. She recalls the owners of a child-care service who almost child-care went broke: "They had a one-year contract, and they thought it would be renewed over the next five years. I talked to them about developing relationships with other groups, such as a corporation that could not set up a center on its own."

When a big buyer encourages a small supplier to develop other customers, it is often fair--if indirect-warning that the business relationship is under review. Davis cites a Southern California telephone carrier that started hinting to one of its minority vendors that "things may change. The vendor's first reaction was anger. But if he had heeded the advice of never letting one customer become more than 40% of his business, there would have been no problem," Davis says.

4. Bad cash management. It's tempting to spend income on oneself instead of the business. Entrepreneurs with the longest-lived businesses put as much as possible into working capital.

"Harris also stresses the need for a sufficient--and manageable-credit line. "When we first opened in 1979, Hughes was going to give us a $10,000 order. I didn't have the cashto go outand purchase the products first, so I went to the bank and explained my problem." Since he could repay the money with interest within 30 days, the bank extended him a line of credit. Harris warns, however: "if you get yourself in a situation where you always have to borrow money in order to do business, the cost of money can be very expensive."