Should You Borrow More Money or Reduce Your Business Size?

A Decision Framework for Struggling Businesses

There is a particular pressure that only a business owner understands. A few years ago, I felt that pressure in one of the businesses I owned. It had become stagnant. They were not doing too poorly, they covered their bills but that was not the reason for starting the business. The managers had become too big and their overhead was quite high. If they continued on that tangent, it would have been just a matter of time before the ship would sink. I held a meeting with the management staff and gave them two options; to trim the workforce and their overhead by about 30% or maintain the existing number of staff and all the accompanying welfare but put in more work and take a short loan to achieve a 40% increase in target. Now, note that the team had been together for over six years. They had gone from colleagues to friends to family. I had personally interviewed and hired all the top officers. I knew their capabilities and knew they were performing below their potentials.  They readily agreed to the new targets rather than lay off anyone. And, work started. Everyone got involved directly in the nitty gritty of the job. Managers no longer hugged their vehicles like some status prizes but released them willingly for work to junior officers. Meetings were short and precise and the management staff that had become too big for day to day tasks gladly went back into the field. The result was heart-warming.

That was one of the easiest mid-year business decisions that I had to steer. Sometimes, a change in routine and input is not the answer; a cut down in size is the only viable solution to a company’s problems. An entrepreneur needs to know how to identify the exact response that his business needs per time.

One of the most uncomfortable decisions an entrepreneur can face is deciding whether to borrow money to see your organisation through a bad spot or to downsize and manage your available resources. Borrowing can provide the oxygen a struggling business needs to survive a difficult period. It can also become a dangerous habit that merely postpones an inevitable collapse. Reducing the size of the business can feel like failure. Yet sometimes downsizing is precisely what allows a company to survive, recover and eventually grow again. The real issue, therefore, is not whether borrowing is good or bad. The real question is: what exactly is wrong with the business?

If the business has a temporary cash-flow problem, additional financing may be the right decision. If the business is fundamentally losing money, borrowing may simply put a band-aid on a festering wound.

First thing to do before taking that decision is to diagnose the problem. Why do you need the money? There is a significant difference between borrowing ₦20 million, for an instance, to purchase equipment that will increase production and borrowing ₦20 million to keep paying salaries because the business consistently does not generate enough revenue to cover them.

Both situations require money. Only one may justify additional debt. A useful starting point is to distinguish between a temporary cash shortage and a structural business problem. A temporary cash shortage occurs when the underlying business is healthy but circumstances have created a short-term gap. For example, a customer owes you a substantial payment but your suppliers require immediate settlement. Your business is profitable, but the timing of cash inflows and outflows is working against you.

A structural problem is different. If your sales have been declining for three years, your costs are consistently higher than your revenue, customers are abandoning you and your margins are shrinking, borrowing more money does not solve the problem. It finances the problem.

The first question or pointer therefore is a critical look at the business. Is the core business still profitable? This is the most important question. Strip the business down to its essentials. If your answer is yes, there may be a case for borrowing. If the business consistently loses money, be extremely cautious about taking on more debt.

The second question/pointer is an unadorned and detailed breakdown of what the need is. What will the borrowed money actually do? Never borrow simply because the business “needs money.” Give every borrowed money a specific assignment.

Will it:

1. Purchase income-producing equipment?
2. Finance a confirmed order?
3. Expand profitable production?
4. Improve technology?
5. Bridge a temporary receivables gap?
6. Replace an expensive short-term obligation with cheaper financing?

These are potentially productive uses.

Be much more cautious when the money will simply do any of the following: Pay recurring operating losses; cover expenses that the business cannot sustainably afford; maintain an unnecessarily large office; preserve unprofitable branches; fund the owner’s lifestyle; pay old debt without fixing its cause; or finance expansion merely because competitors are expanding.

A simple test is this: If I borrow this money today, what specific activity will generate the cash required to repay it tomorrow? If you cannot answer that question convincingly, borrowing may not be the solution.

The third question/pointer is how easily and quickly the business can generate income to refund the loan. Can the business comfortably service the debt? Entrepreneurs sometimes look at the amount they can borrow rather than the amount they can comfortably repay. This is dangerous. A lender may be willing to give you more money than your business should accept. Calculate the expected monthly repayment and compare it with realistic cash flow, not in your best month, not your projected sales, but your conservative estimate. Then ask five vital questions:

1. What happens if revenue falls by 20 per cent?
2. What happens if your biggest customer pays late?

• What happens if the currency weakens further?

1. What happens if fuel, logistics or raw-material costs rise?
2. What happens if an unexpected regulatory or operational expense appears?

A business that can repay its debt only when everything goes perfectly is already in a vulnerable position.

The fourth question/pointer is a good look at your cost structure.

Sometimes the problem is not insufficient revenue. It is excessive cost. This is where downsizing deserves serious consideration. Look at every significant expense and ask: Does this expense contribute directly or indirectly to revenue, efficiency, customer retention or future growth?

You may discover that the business has accumulated costs during better times that it can no longer justify. You may want to look at the branches, the office spaces, number of vehicles, underutilised equipment, duplicated roles, excessive inventory, expensive subscriptions, and unnecessary administrative expenses. In such circumstances, reducing the size of the business may actually strengthen it.

There is no virtue in maintaining ten branches when six profitable ones could generate a healthier business. Downsizing is not the same as giving up. Many entrepreneurs resist downsizing because they associate it with failure. But businesses are not monuments. They are living organisations that sometimes need to become smaller in order to become healthier. A company may close an unprofitable branch and become more profitable. It may reduce its product range and improve inventory turnover. It may move to a smaller office and restructure its workforce while retaining its strongest people. It may discontinue services that consume resources without generating sufficient returns. These decisions can be painful, but they may create breathing space. The goal is not to look big; the goal is to remain viable and stronger.

The fifth question/pointer looks at the customer data. Entrepreneurs can become emotionally attached to products, branches and business models. Customers are less sentimental. Look at what they are actually buying. Which products generate the highest margins? Which services consume the most resources? Which branches are profitable? Which customers pay promptly?

Which customers consume enormous amounts of staff time but contribute very little?

Sometimes the answer to a struggling business is not more money. It is greater focus.

Your data may be telling you that 30 per cent of your products generate 70 per cent of your profit. If so, why are you spending equal energy on everything? The strongest businesses are mostly those that understand what to stop doing.

The sixth question/pointer looks at the market. Is the market problem temporary or permanent? This is particularly important in African markets, where businesses can be affected by inflation, currency movements, fuel prices, electricity costs, import restrictions and changing consumer purchasing power. If demand for your product has fallen because customers are temporarily cutting spending, that may be manageable. But if the market has permanently changed, continuing with the old business model may be dangerous.

If the market has changed permanently, borrowing more money to preserve the old model may make little sense. The business may need restructuring rather than financing.

The seventh question/pointer is at your Debt-to-Revenue reality? Do not look at debt in isolation. Before borrowing, calculate your existing obligations alongside the proposed new debt. Include bank loans, supplier credit, overdrafts, personal borrowing used for the business and other repayment commitments. How much of your future cash flow have you already committed? If too much of tomorrow’s income is already promised to creditors, the business may need restructuring before additional borrowing.

Borrowing is more defensible when:

1. The business is fundamentally profitable.

The problem is temporary rather than structural.

2. The purpose of the loan is clearly defined.

You know exactly what the money will accomplish.

3. The investment will generate additional cash flow.

The borrowing is tied to an activity capable of producing returns.

4. Repayment is realistic under conservative assumptions.

You are not depending on perfect business conditions.

5. The business has a clear exit or recovery plan.

You know how the debt will eventually be reduced.

In such situations, debt can be a tool for growth rather than a lifeline for survival.

Also, trimming the business deserves serious consideration when:

1. The business has been structurally unprofitable.
2. Revenue has fallen consistently without a credible recovery plan.
3. Existing debt is already difficult to service.
4. Several parts of the business are consistently loss-making.
5. The organisation has accumulated unnecessary overheads.
6. The market has changed permanently.
7. The owner is borrowing repeatedly just to meet routine expenses.

That last point deserves particular attention.

If you have borrowed three times this year to pay the same recurring bills, you probably don’t have a borrowing problem. You have a business-model problem.

Sometimes the answer is a combination of reduced size and fund injection. both.

A business may need to cut unnecessary costs while borrowing a carefully calculated amount to fund the profitable core.

Do not make the decision alone. One of the greatest dangers for entrepreneurs is isolation. The owner who built the business often becomes emotionally attached to it. That makes objective decision-making difficult. Bring in another pair of eyes. Your accountant may see a problem you have normalised. Your operations manager may identify waste you have stopped noticing. Your banker may understand the debt implications better than you do. An experienced mentor may ask the uncomfortable question nobody inside the company wants to ask.

Entrepreneurs are constantly encouraged to think big, and rightly so. But there are seasons when the smartest strategy is not expansion but survival. The objective is not to preserve the appearance of success. The objective is to preserve the business.

Fatherhood with Ibe

I Once Met a Man … Who Left His Children an Inheritance No Bank Could Hold (Part Two)

There are conversations that begin as ordinary exchanges but quietly become life lessons. One such conversation happened nearly thirty years ago. I had travelled South Africa to attend a business seminar. During a break, while everyone hurried to network with influential people, I noticed an elderly gentleman sitting alone, enjoying a cup of tea and smiling contentedly into his phone. I had noticed him in the hall earlier and he had made very down-to-earth comments on some subjects that were of interest to me.

I watched him a while and went over to say hello.

We exchanged greetings and soon started talking, not about business, but about life. He asked what I did for a living. I told him and asked about him.

He smiled.

“I’ve done many things,” he replied. “I have been a teacher, farmer, trader, community leader. None of them made me rich.”

I laughed politely.

“But they must have provided a comfortable life.” I said.

“They provided enough,” he said. “Enough to sleep peacefully.”

There was something refreshing about his answer.

In business circles, we measure success by profit margins, properties acquired, or contracts signed. This man measured success differently. As we continued talking, he pulled out an old family photograph from his wallet. It had obviously been there for years. The edges were worn and the colours had faded.

“My children,” he said proudly. There were five of them. One was a nurse, he said, pointing at a girl in the picture. Another had become an engineer. One was a school principal. Another managed a family business. The youngest had become a pastor.

“They all visit regularly,” he said as though it should mean something. Now, it does but then I didn’t understand but I congratulated him.

“Once every year, they all come together with their families and spend a weekend with me. It is always a wonderful time.” He was obviously very happy with his children.

“You must have left them a substantial inheritance.” I noted.

He chuckled.

“I left them an inheritance but no money.” He said.

“Assets then?” I pressed.

“No!”

That answer surprised me. He noticed the confusion on my face and explained.

“I left them something more valuable.”

I leaned forward.

“My time!”

Those two words have stayed with me ever since.

He went on to explain that when his children were young, money was always scarce. There were seasons when buying new clothes had to wait. Vacations were unheard of. Luxuries belonged to other families. But there was one thing he refused to compromise. He said that he always made out time for his family. Every evening, no matter how tired he was, he came home for dinner. The family gathered together. He said sometimes they talked, sometimes they read, watched a programme on television and argued over who performed well or not. Sometimes they laughed over stories from their schools, discussed mistakes or simply sat together in comfortable silence.

“It wasn’t complicated. It wasn’t expensive,” he said, “but it became the glue that held my family together.”

As he spoke, I realised something that many fathers overlook.

Children spell love differently from adults. Many fathers spell love M-O-N-E-Y. Children often spell it T-I-M-E. Of course, every father wants to provide … every father should provide. There is dignity in hard work. There is honour in paying school fees, putting food on the table and ensuring the family is comfortable. However, somewhere along the journey, we must remember why we are working so hard in the first place. The goal is not simply to raise successful adults. The goal is to raise good human beings. Character is not inherited through DNA. It is transferred through daily example.

Children watch far more than they listen. They notice how you treat their mother. They observe how you respond when business goes badly. They remember whether you keep your promises. They notice whether your words match your actions. Long before they understand your lectures, they understand your behaviour.

As a grandfather now, I see this truth even more clearly.

Grandchildren have a remarkable ability to expose your priorities. If I tell them I will visit on Saturday, they remember. If I promise to read a story, they hold me to it. It is not because they are demanding; it is because promises mean security. Children build trust one fulfilled promise at a time.

That elderly gentleman told me something else I have never forgotten.

“Many fathers complained that their teenage children had become difficult.”

“But yours weren’t?” I asked.

He smiled.

“They still talked to me even as teenagers.”

“How?” I asked.

“Because I listened when they were five.”

That answer struck me deeply.

Communication with teenagers does not suddenly begin during adolescence. It begins years earlier.

It begins when a little child excitedly tells you about an insect they discovered. It begins when they interrupt your newspaper time to proudly show you a drawing that makes no artistic sense whatsoever. Those small conversations are rehearsals for bigger ones.

If children learn that Dad always listens, they return when life becomes complicated. If they learn that Dad is always too busy, they eventually stop trying.

One of the saddest sights I have witnessed over the years is fathers trying to build relationships with adult children they never truly knew. It is possible; relationships can always be repaired, but they are much easier to build than to rebuild.

I have spent decades in business. I’ve attended countless board meetings; negotiated contracts, solved corporate disputes and led teams through difficult seasons. Those experiences have taught me valuable lessons. Yet none of them compares with the privilege of hearing one of my children say, “Dad, can I get your opinion on …?”

That sentence cannot be bought. It must be earned. It is the reward of years spent showing up.

Every father is writing a family story. Some write it with words. Most write it with daily choices.

Your children are reading that story every single day.

The gentleman under the tree eventually finished his tea and stood up.

Before we parted, I asked one final question.

“If you had the opportunity to live your life again, what would you change?”

He looked into the distance for several moments before answering.

“I would worry less about leaving my children wealth and spend even more time teaching them how to live.”

I often find myself thinking about those words. Truly, business achievements are satisfying but the values planted in the hearts of children have a remarkable way of living on. Perhaps that is the only inheritance that continues to grow long after the father is gone.

If you are a young father reading this, let me leave you with one gentle thought.

Build your career with excellence and provide for your family with diligence. Dream big dreams and pursue worthy ambitions but while you are building a successful life, do not forget to build lasting relationships with the little people waiting for you at home.

One day, your greatest achievement may not be the business you built.

It may be the children who proudly say, “My father showed me how to live.”

And that, I have come to believe, is an inheritance no bank can ever keep and no economic downturn can ever take away.

Next publication, still on the I ONCE MET A MAN series, I will share a story about a man who was always almost home. I met him over forty years ago in America and his story was one of the earliest lessons on fatherhood that I learnt from a stranger. See you then.