Business owners should recognize the warning signs that their businesses are in trouble and understand the steps they must take to stabilize and revive their companies.

Businesses that end up on the critical list usually show signs that they are ailing long before they need intensive care. By recognizing these signs and making a concerted effort to tackle the underlying problems early on, owners can often turn their troubled businesses around and return them to good health.

Warning Signs

Signs of distress may include:

• Several quarters of declining sales and lower profit margins
• Persistent cash flow problems
• Inability to meet a lender’s requirements for a working capital line of credit
• Declining productivity
• Poor employee morale
• The loss or failure of one or more significant customers

Don’t Wait

Business owners sometimes make the mistake of waiting too long to act on bad news. While a bad quarter or two often can be explained away, a persistent problem shouldn’t be ignored. A business that has previously been on a growth track has all the more reason to investigate the reasons for a downturn promptly.

Get on Firmer Ground

Once a continuing problem is recognized, steps should be taken as soon as possible to curb the downward spiral and stabilize the business. It may be important to update bankers and suppliers regarding the situation and let them know that efforts are being made to turn it around. Open communication can help show that management is serious about reviving the business and can make it easier to enlist help from these groups later on.

Analyze Operations

Decisions can’t be made in the dark. Despite the daily pressures that may only intensify during hard times, it’s important to keep financial records and disseminate key information to management for analysis. Expenses should be looked at in detail to determine which can be reduced or eliminated to improve cash flow.

Declining sales can reflect a slow economy, but a downward trend also may indicate that the business is losing market share. This is not the time to let customer service and quality standards falter. Nor is it a time to ignore the competition. A business that is repeatedly losing sales to competitors has to ask whether it is still in touch with — or has lost sight of — the market’s demands.

Take Action

Once all the groundwork has been laid, it’s time to put the plan into action and start making the necessary changes. This is the point when the owner’s leadership skills are put to the test. It is the time when he or she has to inspire and energize managers and employees to make a sustained, disciplined effort to revive the business and retain the support of suppliers, bankers, and customers.

Many businesses are founded on an original idea or design. Consider Xerox or IBM. Or look at products like Coke or popular published works such as the Harry Potter books. Where would they all be today if their idea or work had not been protected by intellectual property laws? For a growing business, securing the rights to an idea, products, or an identity can be a critical step in staving off the competition and in locking in future revenues.

Patents, trademarks, and copyrights collectively make up the backbone of intellectual property rights. Which may apply to your business depends on the nature of your product or service and what specifically you are looking to protect.

Patents

Patents are used for gaining rights to an invention — which can be a machine, process, design, or even a new type of plant. A patent grants the holder “the right to exclude others from making, using, offering for sale, or selling” the invention in the United States or “importing” the invention into the United States. Patents are issued by the United States Patent and Trademark Office, generally for an initial term of 20 years. Once a patent is issued, it is the responsibility of the holder, or patentee, to enforce the patent.

There are three basic types of patents: utility patents, design patents, and plant patents. Utility patents relate to processes, machines, and other manufactured items, substances, or any improvements thereto. Design patents pertain to design for an article of manufacture. Plant patents relate to distinct and new varieties of plants. For all three types, the invention must be “new and original.”Therefore, the application process necessarily involves a patent search.

While there are numerous online patent search engines, most serious applicants consult a patent attorney, as the cost and consequences of using an already patented idea can be significant. Filing fees can run from as much as $600 to $1,000 or more without legal fees, and approval can take time. If you are considering applying for a patent, ask yourself whether the idea you are applying for is even patentable and whether the idea’s long-term potential outweighs the time and cost of applying for a patent.

Trademarks

In contrast to patents, trademarks protect words, names, symbols, designs, or even sounds and colors that distinguish a product or business. A service mark is the same as a trademark, except that it relates to service rather than a product. Unlike patents, trademarks and service marks can be renewed forever as long as they are actively used in a business.

To claim rights to a trademark, you need only place the “TM” or “SM” next to the trademarked material. However, you must first check to see that it is not already trademarked by someone else. Using a trademark that is already registered can land you in an expensive law suit. So you’ll probably need to do a trademark search — which generally involves engaging a trademark lawyer.

A registered trademark (®) goes a step further and requires registration with the Trademark office of the U.S. Patent and Trademark Office. Although it is not required to register a trademark, it does provide some advantages, most notably, greater legal precedent in the event it is challenged and the ability to bring action in a federal court. Trademark registration also is a prerequisite for registration in foreign countries.

What should you trademark and when should you use it? Consider trademarking any material that is integral to your business — its name, a product name, or logo — anything that connotes the business and factors into its marketability. Make sure to include the mark on packaging, displays, and sales literature, as well as any advertising.

Copyrights

Copyrights relate to “original works of authorship” such as articles, books and other writings, music, and works of art — both published and unpublished. A copyright gives owners the exclusive right to reproduce, distribute, publicly perform, and display their work. Legal protection is extended automatically, as soon as the work is created, though registration provides the copyright owner with the advantage of establishing public awareness of its use. The Library of Congress registers copyrights, which last for the life of the author plus 70 years.

Legal Matters

Intellectual law can be very complex. Identifying the subtle differences between one trademark and another, defining what constitutes patent infringement or what level of “copying” is acceptable over the Internet — are all issues that are regularly debated by lawyers and judges across the country. There’s also a matter of international intellectual property rights; U.S. trademarks and patent grants are effective only within the United States and every country has its own laws. If you are to successfully navigate the complicated world of intellectual property rights, you should consult a legal professional — preferably one familiar with your specific business. Not only can qualified counsel aid with patent or trademark searches, but they can give you direction on what intellectual property needs registering and help you through the application process.

Small business owners who conduct regular reviews of their business’ operating health are more likely to detect potential issues before they develop into major problems. Some areas should be monitored regularly since they hold the greatest potential for harming a company’s long-term financial health.

Cash Flow

You should be concerned if your cash flow is insufficient to cover expenses because payments for goods or services are slow in coming. Beware also if your cash reserves accumulate rather than being put to work. Excess funds may be parked in short-term investment accounts, but ideally, they should be put to work growing the business.

Gross Profit Margin

If it is shrinking over several quarters, your production costs may be rising at a faster pace than your prices. Or, it may because you are charging less than in the past. Either way, declining gross profit margins are a threat to the financial health of your business.

Receivables

If they are growing faster than sales, it is a sign that your customers are not paying what they owe you in a timely manner. You may need to take steps to improve your collection procedures. Be proactive and consistent about issuing invoices and providing any necessary supporting documentation. In addition, contact customers as soon as you detect any delays in payment and stay on top of accounts that are past due.

Debt

Almost every business carries some debt. It’s generally not a problem as long as it is kept under control. Too much debt is a different matter in that it can eat up your cash, cut into your profits, and reduce the return you’re getting on your investment in the company.

Assets

Turnover rates are an important measure if your business carries inventory. When inventory turns over slowly, cash flow suffers. Your best approach is to determine how many days’ worth of product you’d ideally like to have on hand and adapt your purchasing to meet that goal. Additionally, keep an eye on fixed assets. If you have equipment that’s not being fully utilized, you may be able to repurpose it. If not, it may be time to sell or donate it.

Professional Input Can Be Valuable

Business owners should evaluate a broad range of financial information when making decisions. The input of a financial professional can be helpful in the assessment of a business’s overall financial health

There are distinct pluses and minuses that small business owners should consider when looking for a loan.

New small business owners typically enter the marketplace with high expectations — they want to build sales and increase profits quarter to quarter. More often than not, they hope to add employees and, perhaps, open up additional locations. To help turn their dreams of growth into reality, they often seek out financing.

The big question is when to borrow money and on what terms. The decision isn’t always clear-cut, as there are distinct pluses and minuses that small business owners should consider.

The Pluses of Business Borrowing…

Seeking financing can make sense from a business perspective if the loan is intended to help the business expand and grow. For example, using debt to add to or introduce a new line of products, acquire additional property, or take other actions that are expected to boost revenues is an appropriate business strategy. A loan can also make sense when it is used to repay the owner of the business some of what he or she put into the business using personal funds.

…And the Minuses

A business loan impacts cash flow as it is being repaid, often in monthly installments. The interest cost may be an important consideration, depending on the interest rate environment. Business borrowers should understand that their tax deduction for interest expense may be limited to 30% of the business’s adjusted taxable income. However, smaller businesses may be permitted to deduct more. A tax professional can provide details on these rules.

Excessive Debt

Business owners also need to consider other possible negative ramifications from taking on excessive debt. For example, the owner of a small business is typically required to personally guarantee loans to the business. If the business defaults on the loan, then the owner is personally liable for repaying the loan balance. It is possible that in such a situation, the lender would take steps to seize the owner’s auto, home, and other assets in order to settle the debt. Moreover, if the business ended up with more liabilities than assets and was unable to repay what it owed, then the business might be forced to file for bankruptcy.

Seek Professional Input

Before taking on debt, small business owners may want to consult with an experienced financial professional. A professional analysis of the business’s financial health, cash flow, and prospects can help the owner determine whether a business loan at this stage makes sense and how much debt the business can afford to take on.

Running a small business isn’t easy. You probably wouldn’t have it any other way. The ability to survive and thrive is a source of great pride for small business owners. So when a competitor moves in, especially a big one, it can feel like battle lines have been drawn.

Sharpen Your Edge

Before you do anything, accept the fact that you can’t compete on the same level as a large national chain. But that doesn’t mean you can’t win the battle. Study what the competition does and how they do it. Then use that information to define — and sharpen — your company’s competitive edge.

A large competitor will almost certainly have lower prices and a deeper inventory. But you can connect with customers in ways the competition can’t. You can add value to every customer interaction by being attentive and providing expertise and personalized service.

Perhaps your biggest edge is your size. Being small means you can respond to market trends and customer requests more quickly. You can also change and adapt policies and procedures faster.

Rally the Troops

You have another big advantage: You have an established customer base and you know what they need. Establish a timeline to reach out to your customers directly via snail mail or e-mail (or both) with special offers. If you have a loyalty program, consider doubling rewards for a period of time that overlaps with the competition’s opening.

Look for Advantages

Having a big competitor move in may have some unexpected benefits. The new company validates the need for what your business offers and may do a fair amount of advertising. If your marketing budget allows, this could be a good time to do some strategic advertising of your own.

The competition also may create some unexpected opportunities in the future. The new company will change the dynamics of the marketplace, which may lead you to steer your business in a new direction.