The following is a guest post from Luciano de Castro Carvalho, chief transformation officer at Strategy&. Opinions are the author’s own.

Business closure rarely begins with a single event. It usually begins when liquidity, margin and decision speed are not aligned. By the time an owner is considering closing the doors, the business is often facing multiple problems: Cash is not managed, the company keeps accepting unprofitable revenue, creditors are losing confidence and management reacts to symptoms instead of root causes.

The pressure on small businesses is real. Reports concerning small and medium-sized enterprise sectors demonstrate that rising business costs and falling SME profits have been the trend in recent years. More SMEs failed to set objectives to increase business revenues than SMEs that set objectives to increase business profits.

The focus of management should be on disciplined cash control and margin management, rather than on the rampant and unproductive focus on increasing activity and sales. Aligning cash, margin and decision speed should be of greatest concern. Activity doesn’t ensure success; cash and control do. The imperative should be to regain control over the business, and worry about the perfect strategy at a later time.

1. Start with cash, not accounting profit

In the case of a cash shortage, the accounting profit does not matter. In fact, the main concern in cash shortages is whether there will be enough cash to operate in the next week.

Create a cash forecast for the next 13 weeks, showing anticipated inflows and outflows. For cash outflows, consider payments for payroll, rent, taxes and other cash expenses. For inflows, consider collections. Once completed, the cash forecast will show the cash runway, cash outflows that can be delayed and actions to extend the cash runway. The cash forecast should be updated at least weekly. It can be updated more frequently if the situation requires.

2. Stop assuming that all revenue helps

It is crucial to analyze cash outflows and inflows to gain a full understanding of the cash situation. Thorough analysis of cash outflows and inflows may indicate cash shortages. There are products and/or customers that, while providing revenue, may create a cash shortage situation. These products may be unprofitable.

Analyze cash and working capital for products and/or customers and determine profitability. Consider increasing prices for unprofitable customers and/or products. If a customer is unprofitable, consider changing the terms of service for that customer. If a customer is unprofitable, providing service for that customer may not be beneficial in the long run.

Owners must understand that increasing prices may help the situation and may benefit in the long run, even if revenue and/or customer loss is experienced. If a product or service is unprofitable, stop providing that service. If a product is unprofitable, increase the price of that product.

3. Stabilize before trying to optimize

To begin a turnaround, the focus is on purchasing more time. This means substantially reducing or eliminating discretionary spending. Positive cash flows may be realized through the collection of accounts receivable. Favorable terms on accounts payable may be negotiated with suppliers. Inventory and receivables may be reduced through sales, and expenses may be controlled by reducing non-essential activities.

4. Engage creditors and customers early

Typically, owners/managers engage finance providers, landlords and suppliers too late. It is imperative to develop a feasible cash flow forecast and to provide this to creditors, along with documentation of efforts to improve cash flow. Making such commitments to creditors without the input of professional advisers may compromise the viability of the business.

It is imperative to engage customers early as well. Long-term customers may have the faith and confidence to pay a higher price, pay in advance or take different/more service. Understanding the terms customers are offering is critical to helping the business develop options for cash flow. Customers may also help the business understand the terms they are willing to offer, allowing the business to assess whether it is in the customer's best interest to continue the relationship.

5. Speed up management actions

As cash flows out of the business, fortnightly or monthly reviews become too long. The focus should be on short, daily reviews to determine how much cash the business received, which invoices need to be paid, how much the business owes, which customers have not paid and which suppliers are at risk.

Cash flow must be reviewed to determine the effectiveness of management's efforts and to determine which initiatives are actually helping the business.

The cash forecast will help management make more informed decisions, and its potential benefit outweighs the forecast cost. Time is of the essence. A delayed decision in a crisis ultimately costs the business more.

6. Eliminate complexity the business can no longer afford

Complexity exists in all businesses, and small businesses are no exception. This complexity may take the form of offering too many products or services at too many price points, segmenting the market too finely or customizing too extensively. If management is not disciplined to adopt the robust yet pragmatic perspective of pruning and simplifying in the interest of the business, it may eventually lead to the failure of a small business.

The viable core of the business identifies the customers and products that, when combined, provide a sustainable business. In order to enhance the sustainability of the business, prune what does not contribute to the core.

Founders often have a hard time with this exercise, as the pruning may include long-standing, and possibly legendary, products or customers.

It may be more advantageous to seek a merger or sale of the business or consider a recapitalization.

7. Know when saving the business means changing it

Saving a business does not always mean preserving it exactly as it exists today. The right outcome may be a smaller and healthier operation, with sale of assets, a merger with a stronger operator, new capital under different terms, a formal restructuring or an orderly wind-down that protects employees and creditors better than waiting until liquidity is gone.

Once cash is exhausted, the owner has fewer choices and less credibility. Earlier action preserves more value, more control and more dignity for everyone involved.

The practical rule

A failing business should be managed around a few non-negotiables: build and update a 13-week cash forecast, understand true contribution margins, stabilize cash before optimizing the business, protect the profitable core, engage creditors early and run a daily execution rhythm until the danger passes.

A crisis rewards facts and speed, not optimism or delay. For an owner facing the possibility of closure, those practices are often the difference between shutting the doors and earning the time to rebuild, restructure or transition on better terms.