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Current Challenges Faced by Small and Mid-sized Businesses and Strategies to Overcome Them

by EmergeLaw, PLC


Running a business is hard, particularly in times of economic uncertainty. Supply and staffing challenges, legal disputes, excessive debt and other cash flow difficulties – to name a few – can strain a company’s profitability, or worse. This article explores some of the current challenges faced by small and mid-sized businesses and offers strategies to overcome them.


1. Supply Challenges

Small and mid-sized businesses (“SMBs”) and consumers are living with the reality of uncertain and unpredictable supply chains. Obvious examples include the lack of building materials affecting both commercial and consumer building; long lead times on consumer durables; and lack of computer chips affecting automotive production and sales.


Many SMBs have relied on “just in time” supply chains. Survival now requires an adjustment to “just in time” with the addition of a safety net of “just in case” requiring more sophisticated risk management. COVID-19 exposed vulnerabilities in local, regional, national and international supply chains. It became evident that the loss of even one component along a complicated supply chain could force a slow down or even cause a business to go dark.


The most important weakness revealed for many businesses is how unaware they were of what was going on lower down in their supply chains. In other words, “sub” suppliers, are intricately tied to a SMB’s survival, but many SMB’s have been unaware of lower tier supplier issues, and had no ability to pivot from a sub-supplier’s disruption of the supply chain. The problem is multiplied if supply issues are national or international.


What’s the solution? Many SMBs have been forced to engage in a continuous cycle of risk analysis, and reconfiguration. Companies must build in a new level of flexibility to protect against future disruptions. Some key focus points include:


Emergency preparedness

Now that “shutdowns” of the entire economy are a possibility, companies should prepare and create emergency plans. This includes supply issues as well as budget reserves.


Double Down on Inventory

Although not possible for perishables, a plan to manage through a disruption and ensure at least essential inventory for a short-term could be a business-saving tactic. Consider supply chain backups before the need arises.


Flexible Supply

Called “elastic” by some experts, it is the ability to slow-walk some items in the supply chain to reduce costs to be able to perhaps pay more for essential items.


Risk Assessment

Risk assessment to supply chain issues should be a part of most SMB’s overall risk assessment involving both financial and non-financial criteria. For example, SMBs should consider planning for continued employee shortages, remote working assessments, loss of supply chain stability, and other scenarios once considered force majeure quality, in a company’s overall viability.


Hiring Professionals

While costly, hiring professionals to restructure or reorganize a business to have some of these provisions in place is money well spent if it saves and ultimately grows a business.


2. Staffing Challenges

The COVID-19 pandemic has triggered one of the worst jobs crises since the Great Depression, but in an entirely different context. It is not a lack of jobs – to the contrary, employers are desperate for workers. Staffing shortages continue to be a major obstacle for SMBs as many potential workers have yet to re-enter the job market.


According to the Bureau of Labor Statistics, in June there were 9.3 million job openings, while at the same time there were more than 9.5 million unemployed Americans looking for work! The statistics are confusing because the labor shortage is being seen across multiple industries and in every area of the U.S. economy. Although experts disagree on specific causes, at least three reasons for the labor “shortage” include: (1) COVID-19 health concerns (2) government unemployment benefits, and (3) the “skills gap” that COVID-19 exacerbated.


Health and Safety

Pandemic health concerns such as safety, child care, and worker’s rights have shifted the power to improve job conditions from employers to employees. Many employees are now unwilling to return to full employment requiring a five-day, in-office work experience. Employers, desperate for workers, now must face this reality. In addition, during the pandemic, women with family responsibilities marked the largest loss of workers. Incentives once considered benefits are now viewed as necessities, especially by women (click here for Nancy King's excellent article on the power of women working together). Finally, hourly workers, previously held hostage by a lack of a voice in raising wages and benefits, now have leverage to control the conversation. Rising wages are likely not enough to return workers to a more stabilized workforce; it is going to require real quality of life, work/life balance changes that will lure employees back, including attention to social justice movements.


Extended Unemployment Benefits

There is real debate whether extended unemployment benefits have kept the workforce from returning in significant numbers. Although some states ended extra employment benefits in June, most allowed the benefits to expire in September 2021. Thus, the effects have not yet been analyzed. However, most experts have floated the theory that the end of extra unemployment will bring workers back to the labor market. Markets suffering the worst are those dependent upon manual labor or more traditional “blue collar” jobs. These are the same employees facing the highest COVID exposure, and paying them more may not be enough to overcome pandemic fears. With the holiday season approaching, it will be a true test to see if the more than 9.5 million unemployed Americans actually fill the more than 9.3 million jobs available.


Closing the “Skills Gap”

Even before the pandemic, America was experiencing a skills gap. Before March of 2020, businesses were realizing that there weren’t enough workers with the education and training to adapt to technologically driven changes, globalization of business, and automation of many industries. The pandemic turned the gap into a divide. Businesses were forced to adapt quickly and relied even more heavily on workers with strong technological skills. What does this mean? SMBs are not going to be able to “hire their way out” of this crisis. Employees are looking to be trained, “upskilled,” or reskilled to secure their future, and employers must take these needs seriously to ensure they will be fully staffed to fully reopen and grow businesses.


Overcoming Staffing Challenges

There are numerous strategies for SMBs to overcome staffing challenges. While some make more sense for some businesses and industries than others, just about all boil down to increasing the cost of doing business. Some of these strategies include:


Higher Compensation

Paying more to workers is the most obvious way to get more of the right employees in the door. This approach comes with clear downsides, especially for businesses with thin margins. Paying a one time signing bonus may also be effective without the ongoing expense increase.


Increased Benefits

Employees like and appreciate benefits, so providing more in the way of insurance, discounts, or allowances may be an effective, if costly, strategy. Some SMBs are increasingly offering referral bonuses to existing employees who connect the business with new hires.


Investments in Employees

Many workers say that being appreciated is nearly as important as compensation. SMBs that invest in their employees’ personal issues such as mental health, safety of the workplace, and a company culture of support may attract and keep a higher quality workforce.


New Training

SMBs that invest in training, upskilling or reskilling of their labor force often reap substantial future benefits. While training can be costly in terms of money, time and resources, it can provide stability for both employees and business growth.


The New Workplace

Attracting and retaining talent in a competitive job market means giving employees what they want. Many employees rank flexibility at the top of their priority list. Offering and sustaining remote and flexible schedules wherever appropriate may be a key to success.


Get Creative

An extremely tight labor market rewards companies that are creative. Owners and managers of SMBs should not be shy about “borrowing” creative ideas from competitors. A few ideas include spending time where your ideal candidates “live” online; hosting hiring happy hours in your office; re-engaging with qualified past candidates; and partnering with other entities (schools, churches, nonprofits, staffing agencies) to train or hire.


3. Uncertainty And Overleverage Challenges

According to the United States Bureau of Economic Analysis, by the end of 2020, the total debt outstanding for nonfinancial businesses in the U.S. jumped to $17.7 trillion. The debt surge was likely caused by COVID shutting down the economy and companies borrowing money to survive.


While some businesses and industries have bounced back like a loaded spring, others are struggling under a mountain of debt. The government has allowed banks to be more flexible in defining what loans must be “reserved for” on their books or moved into special assets. With that elastic approach ending for banks, pressure to turn troubled debts back into performing loans may occur just when businesses who have survived COVID cannot afford to pay. Add on the uncertainty of the future, and maybe even just one unforeseen obstacle such as unexpected litigation and an overleveraged business can find itself in crisis mode.

Business financial distress can come from many sources, but it typically manifests as insufficient cash flow to meet operating obligations and debt service. Strategies for addressing financial distress include:


Negotiation and Mediation

One of the most important avenues available to a business is open communication with lenders and customers about finances and potential litigation issues. Hiring an attorney to assist in those negotiations may seem costly on the front end but can result in significant savings and significantly better outcomes. If those negotiations reach a standstill, engaging a mediator may be an excellent option to get to the finish line in a cost-effective way.


Hire Professionals

A business that sees problems ahead with its lender or customers should hire a qualified professional before things escalate. Sometimes the right professional is a business consultant or financial advisor. Other times, particularly when a lender is involved, working with a restructuring and workout attorney is the best way to defend against an unworkable Forbearance Agreement, a pending foreclosure, a lawsuit, or an involuntary bankruptcy petition.

Develop A New Business Plan

Having a workable business plan with projections and cash flow forecast based on different scenarios can be essential to survival. In any loan default situation – whether a monetary default (i.e. payments missed) or a covenant default – the lender will likely ask for a rolling 13-week cash flow projection. Combining this with collateral availability is an important forecasting tool for the business but also, with the advice of counsel, may be helpful in prioritizing payments when there are competing creditors for limited dollars. Cash flow is the bottom-line determiner of survival and prosperity and being smart about forecasting, planning, and payment of creditors is critical.


Government Programs Still Available

Owners may no longer apply for first or second-draw PPP loans. However, other programs aimed at small business recovery such as the Employee Retention Tax Credit (ERTC) and the Economic Injury Disaster Loan (EIDL) remain open.


Rethink and Reinvent

It is almost axiomatic at this point that the genie is out of the bottle on reinventing the traditional office space environment. Businesses must invest, despite the potential cash flow crunches, in creating the workspace environment that will bring workers back into the labor market where they feel creative, motivated, appreciated, and safe. Beyond workspace, the future belongs to companies that are creative and nimble.


Less Conventional Options

Other options for improving cashflow might be: (a) crowdfunding sites such as Kickstarter; (b) factoring of receivables; (c) leasing or selling of company owned assets; (d) supplier financing; (e) forming buying cooperatives with competitors to negotiate lower prices from suppliers; or (f) moving to a totally virtual business to reduce overhead on a temporary basis to increase cash flow.


4. When The Wheels Come Off

Sometimes, despite a company’s best efforts, negotiations fail, businesses run out of cash, or some unexpected event, such as a lawsuit being filed, causes the company to need professional help to reorganize and rebuild.


Chapter 11 is a complex legal action, and no company would choose it as a first resort. But when survival is on the line, Chapter 11 protection is a powerful tool that can be the difference between future strength and profitability on the one hand, and liquidation on the other.


Filing a Chapter 11 petition triggers an "automatic stay," which stops nearly all lawsuits, collection actions, and payments on debts that existed prior to the filing. This allows the company to stockpile cash and gives management much-needed breathing room to focus on profitability, make operating decisions, and formulate a reorganization plan. In most other respects it's business as usual while operating under Chapter 11 protection.


Once approved by the court, the reorganization plan – which can erase debt, change payment terms, and resolve all manner of disputes – becomes the new contract between the company and its creditors. The company then emerges from Chapter 11 as a newly constituted enterprise with clear and manageable obligations.

 

EmergeLaw, PLC is a boutique law firm focused on business bankruptcy, corporate reorganization, and creditors' rights. Serving clients throughout the Southeast, our experienced attorneys represent debtors, committees, secured and unsecured creditors, investors, avoidance action defendants, and every other constituency in commercial bankruptcy cases, out-of-court workouts, and other complex matters where insolvency is an issue.