SURVIVING THE GOOD TIMES
Jan 1, 2001 12:00 PM,
There is no telling what surprises lie around the corner. When cash flow becomes tight, you can’t pretend you’re from Florida and demand a recount.
With the exception of marriage, have you ever experienced a life-altering contradiction? Take Mr. Osborne, the inventor and former owner of one of the world’s largest portable computer companies, Osborne Computers. For those unfamiliar with the company, Osborne Computers was the leading producer of portable laptop computers. Of course, weighing in at a range between 12 and 20 pounds, you wouldn’t necessarily call them laptop computers by today’s standard. But during the 1980s, when you thought of portable computers, only one word came to mind: Osborne.
Things were going gangbusters for Osborne Computers. Unlike many upstart Internet companies today, it was making tons of money. Then, one fateful day, Mr. Osborne announced to the public that within six months his company would be introducing a newer, faster and, of course, cheaper model. Do you remember what happened? Sales stopped overnight because everyone waited for the new computer. Within six months, Osborne Computers went the way of button flies on mens’ pants: it became part of history! It goes to show that just when you think it’s safe to go in the water, you can become shark food.
WHY GOOD COMPANIES CAN HAVE PROBLEMS
In business, even when times are great, as they are now, there is no telling what surprises lie around the corner. When cash flow becomes tight, you can’t pretend you’re from Florida and demand a recount.
Good businesses in good economies run aground for many reasons. First, they may not understand their real costs of performing a project. Second, many companies ramp up their overhead in anticipation of higher future sales. That’s what we did in the mid-1980s. The sales didn’t materialize, and we almost joined company with Mr. Osborne. Another reason could be a product from a manufacturer that didn’t perform as specified on a major project. Although the manufacturer will tell you that you’re the first person ever to have the problem, we all know the truth: You’re just an unlucky Beta site. Unfortunately, you have to spend your limited financial, technical and intellectual resources to take care of the client. Finally, in many growing businesses, cash outlays usually grow much faster than cash intakes, which creates a negative cash-flow position.
DEALING WITH ADVERSITY
Although the previous examples represent just some of the things that can go wrong, hardship can befall any business, even a good one. How do you deal with such dire events? When circumstance throws a bucket of manure in your face, you need to follow these simple, commonsense rules.
It’s easier said than done, but you have to put on your war hat and reinforce the theme that survival of the company as a whole is greater than any single component or individual. If nonessential employees have to be terminated, then you have to make the tough decisions now rather than later. That’s why you’re called the leader.
You need to project strength. If you show weakness or are even perceived as being weak by employees or the outside world, you’ll be tomorrow’s lunch.
IMPLEMENT RIGID FINANCIAL CONTROLS
Although I discussed many ideas in my June column on accelerating cash flow, you can take other ‘war time’ steps. First, adopt this philosophy when purchasing items for your company: If you need something to survive, buy it. If it’s nice to have, it can wait.
Second, approve all purchase orders. If this is too burdensome for your company, then place a minimum threshold requiring your approval for any purchase greater than, say, $500.
At the same time, you should sign every company check. Not only will this control cash outflows but it also will educate you about how the cash really moves through your company.
Third, scrutinize and justify every line item in your overhead, including any sacred cows. If you have an opportunity to put an item out to bid, such as insurance or telephone service, do it. You’ll be surprised at the amount of money you can save by taking this simple action.
SEEK ADDITIONAL FINANCING FROM EXISTING SOURCES
If you need more funding, go to an existing source such as your bank. Supported by graphs and charts that depict a realistic environment, explain to them that this is a temporary problem. If your projections are too optimistic, they won’t believe you.
An existing funding source will be more likely to loan you additional money becaue it already has a cash liability with your firm. The source usually understands that if it doesn’t support you now, previous financial commitments could be in jeopardy.
If you go to a new source of funding, such as a private investor, the chances are they will demand too much equity because you’ll be considered a high-risk investment.
RAISE PRICES ON ADD-ONS TO EXISTING ACCOUNTS
Raise prices by a minimum of 10% to 15% on additions to existing accounts. You may be in this condition because you are not charging enough for your services. By selectively raising your prices, you’ll increase short-term cash flow. You’ll also discover a surprising fact: 90% of your clients will not even notice the price increase, and you’ll negotiate with the remaining 10%.
As anyone in business knows, bad things can happen to good companies, especially during periods of exponential growth. When you’re in the middle of this firestorm, and everyone is nagging you for money, you can feel depressed and lonely. That’s why you have to be strong and take action because no one else will defend your interests. And after all is said and done, you’ll be stronger than your competi-tors and ready to handle any business challenge head-on. Besides, when it comes to making payroll, demanding a recount just doesn’t cut it.