3 Critical Steps to Determining the Viability of a Business

by Bob Cohen
Ohio TMA News – May 2009

The critical steps to determine viability of a business are no different in a challenging economic environment than in a prosperous one. First, is there a core business? Second, is there a management team in place that can effectuate a profitable or turnaround plan? And third, does the company have access to financial resources that will sustain its progress through the growth or turnaround plan? If any of these questions meets with a resounding “no,” it is unlikely the business is viable.

What Is a ‘Bernie Business’?

A comedy motion picture was released in 1989 called Weekend at Bernie’s. It is a movie about two young insurance executives who discover their boss is deceased. Believing they are responsible for his death, and that a hit man won’t kill them if Bernie is around, they attempt to convince people Bernie is still alive.

A “Bernie Business” is much like the movie: the company has no core business, has ineffective management and lacks the financial ability to responsibly perpetuate the business. Even so, owners or management continue to operate the business for fear of losing their company or losing their jobs and the jobs of friends employed by the company. A “Bernie Business” is a company that is no longer viable, yet owners and management continue to operate for fear of the alternative repercussions.

Is There a Core Business?

A company has a core business when there is demand for its product or service at volume and pricing levels that can reasonably provide a favorable return to the company’s owners. While that return is customarily measured financially in either improved equitable value or profit, it may also be measured in the ability to provide jobs or support some objective other than financial performance. Other considerations would include the ability to sustain a multi-generation family enterprise for its namesake, or to provide a supporting product or service to a sister division where the profit is ultimately realized.

A key activity to determine whether a company has a core business is to establish definable, measurable objectives against which company performance can be compared monthly or annually. There are two traditional measures to determine if there is a core business. First is the ability to price product competitively, yet profitably. Second is the ability to capture adequate market share to support the plan’s volume objectives, achieve sustainability during challenging times, and sustain profitable growth during more favorable economic conditions.

To determine if there is a core business at a ‘Bernie Business,’ it is critical to realize the only difference between a business and a hobby is that the former has a profit motive. Owners and managers of a ‘Bernie Business’ have essentially transformed an enterprise into a hobby.

A viable company will have a clearly identifiable core business.

Is There an Effective Management Team?

An effective management team is one that is best equipped to address the environment in which the company is engaged. Management of a rapidly growing company should have prior success managing organizations with equivalent or greater growth. Management of a company in its infancy should include managers with significant entrepreneurial skills including full profit and loss responsibility. The management team of a company in crisis needs to implement a turnaround strategy, and therefore should include a manager who has successfully completed the turnaround of a comparably sized company. Many good managers are available, but not all good managers bring successful experiences that are appropriate to the situation a company faces.

The final dimension of management effectiveness is style, or approach, to complement appropriate skill and experience.
Effective managers can be placed into two groups: Marines and Policemen. The ‘Marine’ manager is strong at making changes to the status quo and overcoming obstacles. The ‘Policeman’ manager is most effective at implementing an established plan and maintaining actions to remain on the plan. Sometimes you have to place the Marines on hold, and sometimes you must place the Policemen on hold. In the appropriate scenario, each can be most effective. A ‘Bernie Business’ has Policemen when they need Marines, Marines when they need Policemen, or no effective management whatsoever.

Having a good management team is not adequate. A viable business must have a good, effective and appropriate management team capable of accomplishing change if change is necessary, or skillfully implementing an existing plan when appropriate. Viability of the company depends on the demonstrated ability of the management team to implement appropriate strategies at the appropriate time.

Are there adequate financial resources?

Inadequate financial resources can place considerable pressure on a company’s viability, whether in growth mode or a turnaround scenario. A solid core business and an effective management team provide the company with a plan and the opportunity to succeed; however, without resources to fund the business through growth or through a recovery, there will not be a viable enterprise.

During periods of rapid growth, cash flow is critical to funding the working capital requirements of a business plan whose objectives include profitable, sustainable growth. During depressed times, when the objective is to survive, the company must have adequate working capital and cash resources to be able to emerge into a more active economic environment.
Without the ability to fund working capital requirements, neither a growing business nor one trying to survive an economically depressed period will be considered viable. You know that you have a ‘Bernie Business’ when your plan calls for the continual deterioration of cash and cash collateral with no end of such deterioration in sight.

In conclusion, companies with the greatest viability potential are those that can clearly demonstrate a core business, have an appropriate and effective management team in place, and have resources to ensure working capital is available to implement the company plan. On the other hand, a company whose product or service lacks a market, has an inappropriate or inexperienced management team, or inadequate financial resources to implement the company plan, is not a viable business and has become a ‘Bernie Business.’