JoAnn Laing's Blog - All About Small Business

According to surveys conducted over recent years, giving bad news to employees, customers, and vendors is rated one of the most challenging tasks small leaders perform during the work week.

These same surveys indicate that small business leaders believe the task has become more difficult due to the recipients’ changing attitudes.

When it comes to employee reception to negative statements on the part of managers, some small business leaders report extremely distressful reactions bordering on physical alterations. While stopping short of violent personal attacks, employees have been known to destroy property, equipment, or paperwork in reaction to conversations that impart discharge notices, position changes, promotions or demotions, or compensation reductions.

When dealing with clients, small business leaders report rising intolerance on the recipient’s part of even one misstep. Where, in the past, loyalty to the provider would enable the negative information in the context of overall performance, in today’s world, a single step is enough to cause total separation.

When giving bad news to vendors, the reaction can range from cutting off services and deliveries early, bad-mouthing in the industry to the threat of legal action.  While the impact of negative information can be softened, it can’t be erased.

Here are some ways of lessening the impact of negative communication on the company’s internal and external communications.

For employees, the most critical element of imparting negative information is for the company to do the telling. Rumor mills can outrun corporate decision-making and can never communicate all of the details.

What’s more, according to communication experts, rumors feature the worst possible scenario first. Make sure information about the company’s decisions, such as whether to fire, demote, cut salary, or retrain employees, is the first heard from the company.

The delay means the company grapevine will work to undermine whatever positives are possible.

No matter how dire or menial the negative news is, ensure there is some positive associated with its implementation. But don’t emphasize the company’s benefit; rather, emphasize whatever positive will accrue to the individual affected and to his or her closest workmates.

Whatever news is being imparted, repeat it at least twice in the initial meeting. Tests have shown that in workplace situations, employees do not hear all of the relevant information when receiving even trivial bad news. It is essential to repeat the news at least twice in the initial discussion; put it in writing and then repeat it verbally one or two days later. At all times, solicit feedback from the employee, who is in no mood to provide any, let alone positive feedback. Accept the fact that accurate feedback will only come in the future.

Communicating bad news to customers requires additional finesse. The customer relies on price, quality, and consistency. When bad things happen, such as a price hike, product scarcity, or missed delivery, the experience affects the buyer-seller relationship far more than positive events. There is an adage: One damn is equal to 10,000 bravos.

The best way to lessen the impact of one bad event is to sandwich the imparting of this news between two positives for the customers. For years, this was the hallmark of IBM sales and servicing. For example: “Your dry cleaning will be free next month. We are sorry, but we burned a hole in your shirt. We have repaired the hole, and it is no longer visible.”

As with employees, it is best to convey the negative information immediately rather than wait until the client asks. The recent run on the nation’s banks was triggered in part by the banks under review’s failure to adequately inform depositors of the difficulties they faced. Had the banks been readily forthcoming, some experts believe, some of these failures could have been avoided.

While vendor relations are usually contractual, providing bad news, such as cutting back on products/services or ending the relationship, needs to be done in accordance with the contract and handled with finesse. Explain why the business is going in another direction, why the quality has slipped, and why we have tried to work with you without success.Above all, remember what the purveyor of bad news wants: Acceptance.

Acceptance is often the most challenging response to obtain.

Nevertheless, bad news cannot wait; share it openly and honestly and be prepared to answer questions.

A recent national survey found that 67% of U.S. small-business owners plan to pursue funding for their business in the next 12-months. This despite the obstacles high interest rates and stricter credit standards making it more difficult for all but the most profitable companies to obtain financing.

With the stock market betting the Federal Reserve will cut its interest rate later this year, should small business leaders wait to expand company borrowings? The answer is not simple.

Business loan by Nick Youngson CC BY-SA 3.0 Pix4free

First, small businesses need new loans from reputable lenders to finance products and services as the nation’s economy begins to expand. Delays in finding finance mean the small business has less time to prepare for the expanding sales situation. Depending on when it is recognized, a booming economy requires small companies to find the funds to grow with it.

Three years ago, when the interest rates charged by the Federal Reserve began to climb, many innovative business leaders locked in credit lines at rates, according to banking groups, which insulated them from the highest interest tariffs. Most of these agreements ran for two or three years and are due for review this year. According to these same banking advisors, the rates for renewal for even the highest-quality clients are less attractive. Many companies need more credit line extensions at almost twice the average percentage.

At the same time, banks and other financial institutions spend twice the usual time vetting new customers for corporate loans. Despite the desire for new customers expressed by banks, they are also rebuffing more of these new applicants than at any time in their history. Senior bank officials expect these two dynamics to remain the same later this year and into 2025.

Also, specific industry sectors or industrialists are finding it harder to obtain construction or other speculative loans routinely approved through short-term loans.

Dupaco Community Credit Union

The small business loan sectors also have a seasonality that works against waiting too long for this expected drop. The first and third quarters usually see peak demand for new loans, which likewise come due during these poor times. While this first quarter is not entirely over, early indications are that loan demand and extension requests are up.

Here are four things you can do to ensure that monies are there for you when needed.

               Strengthen your relationship with your current bank and reach out to other institutions.

                Add monies to your deposit history regularly.

                Have your accountant build pro forma balance and income statements to share with your banker.

                Build up a cash reserve in your bank and talk often and candidly with them about your operations.

In summary, act now so your business will have the funds to expand.

In their desire to increase tax revenue, improve oversight, and strengthen its regulatory grip on small businesses, governmental agencies are close to adding major regulatory requirements.

Image by rawpixel.com on Freepik

Designed also to help identify companies being used to spy on American companies to gain trade secrets, efforts to date for informing small business leaders have been spotty at best.

Let’s start with the change already law and which estimated 20+ million American small businesses are already in violation.  Charged with implementing these new requirements is the Financial Crimes Enforcement Network (FinCEN).  Under the law that went into effect January 1, of this year, FinCEN is bringing into new databases registered information which more substantially disclose who are the beneficial individual owners of the millions of small businesses.  Failure to comply, can result in hefty fines.

Approved by Congress in by the 2021 Corporate Transparency Act, individuals can no longer hide under opaque private companies, foreign entities and other subterfuges when owning, investing, or managing small businesses with less than 20 employees.  Companies must provide additional background, verifiable personal data, and financial information on any person who benefits from the operation of a small business.

In the first months of 2024, only about 400,000 of the nation’s estimate 22 million small businesses had complied with the law’s requirement.  FinCEN intends to step up its educational efforts after the April 15th Tax Deadline.

Image by rawpixel.com on Freepik

While this registration program poses additional burdens, perhaps the more worrisome issue facing small business leaders is the expanding effort by the Department of Labor and the IRS to further limit the use of casual workers.  It is estimated that in 2022 more workers received 1099s forms than W2 forms.  The former wage reporting mechanism reports to the government of wages earned but requires no contributions to social security or other deductions usually taken from paychecks of full-time employees.

The definition of who is a full time worker and who can claim 1099 status has been under attack for 10 years and the latest series of proposed regulations go far forward of anything previously proposed.  These changes are currently up for review and it behooves any small business leader to become aware of them quickly.

Plus there are two other regulatory issues threatening small business employer-employee interaction. The first concerns franchise workers.  There the Department of Labor is still trying to dictate that an individual franchise owner is part of a large company made up of franchises.

The second, and more ominous, is extending its authority into such areas as home-based childcare and Uber-type businesses.

Staying abreast of these trends is another management requirement facing small businesses this year.  Stay tune, more may be coming.

Because by nature they are optimists, small business leaders tend to avoid talking about bankruptcy of their company and/or themselves.

Yet, in 2023, commercial bankruptcies increased by 72% year-over-year, and filings for the discharge of personal debt increased by 18%.  With experts expecting these numbers to go up in 2024, the good news is that they remain below pre-pandemic levels.

However, small business leaders should still be cognizant of the growing cloud as bankruptcies are becoming more frequent.  “Bankruptcies in all filing categories climbed last year amid the evaporation of pandemic emergency responses, increased interest rates and tougher lending standards,” said ABI Executive Director Amy Quackenboss.

Having identify the trend, there are ways to identify potential issues which could affect your company’s future.

Experts warn that as interest rates remain elevated, financing requirements become more stringent, weakening customer loyalty, increasing geopolitical tensions affecting global supply chains, and growing debt loads, even the strongest companies must remain alert to maintaining financial strength.

Based on studies of small business bankruptcies, there are four keys to identifying possible future problems.  This is the so-call company ‘FQ’ of financial quality.

1. Weekly cash summary: Does the company have enough cash to finance the coming week’s financial outlays?  Including payroll, expected materials delivery, loan repayment.
2. Line of Credit: Is there a source of funds available to immediately cover any shortfall in the company’s cash position?
3. Accounts receivable: Are 60% or more of all outstanding debts within 80 days of initial rendering?
4. Accounts payable: Are 60% of bills owed outstanding more than 80 days?

If the answer to any of these four questions is yes, small business leaders should highlight them and take steps to alleviate.  If they persist beyond two months, it is time to institute remedies.

Because many companies, particularly in their early stages, operate on thin margins, FQ guidelines often appear.  This doesn’t mean the company is headed for failure.

However, should they persist for long periods of time, it may suggest that bankruptcy be considered.

As Winston Churchill said: “Success is based on a long series of failure.”

Struggling businesses and families can turn to the proven process of bankruptcy for a financial fresh start.