- THE MAGAZINE
If your company is experiencing hard times, remember this simple axiom: profits grow the business while negative cash flows bankrupt it. When you are in survival mode, cash is king and profits are secondary. This tidbit of managerial wisdom could keep your company out of bankruptcy court.
This axiom holds whether your company is expanding or contracting. Growth is no panacea. Companies can and do grow themselves into bankruptcy. If they are profitable, they will usually survive the restructuring. If their business model is flawed (like many of the earliest Internet companies), they will tumble into oblivion. In the long run, profits are important-but survival mode is not the long run.
If positive cash flow is the key to survival, how do you turn it positive? The answer is simple: buy what you need and only hire the personnel needed to do what must be done. For the time being, forget the luxuries, ignore the future, and look to the past. Looking to the past is especially useful if you are losing sales and customers.
Growth and prosperity breed luxuries, such as cost of living raises, power lunches, club memberships and bonuses. We are easily deluded into thinking that these are necessities, the costs of doing business. In reality, they are unnecessary extravagances. By looking to the past, you can spot these unnecessary layers of fat that prosperity has spawned.
A backward look will also help you rethink how to run the business. For instance, salespeople may not need to call on customers; they may only need to call up customers. Purchasing doesn’t need to buy economic order quantities; they need to implement just-in-time stocking. Schedulers don’t need to build scrap into an order; operators need to build quality into the part.
In a troubled market, your flagship customer might also be the most expendable. Use direct costing techniques to determine which customers are cash-negative and expendable. By assigning costs to particular customers, you may discover that one or more of those customers are consuming more cash than they are generating. If that is the case, dump them or reduce some of their cash-gobbling services. A customer that isn’t generating cash isn’t a customer. It is a charity case. Apply this same test to your product line.
Deliberately shedding customers is difficult, but sometimes necessary. If a customer is slow to pay their bills, place a credit limit on them and refuse to start an order once that limit is reached. The key here is start an order, not ship an order. If an order is made, unless it is generic, the customer has as much leverage on you as you have on them. A customer’s credit limit should include receivables, finished goods, work-in-process and dedicated raw materials. From a cash perspective, these are the same. It’s better to have five cash-positive customers than 25 cash-draining customers.
If shedding a customer is difficult, shedding people is more so. Specialization is the key to productivity and productivity is the key to profitability, but you aren’t seeking profits. Right now, you want cash. And you can free up cash by combining jobs, shedding people and cutting payroll. In tough times, you must make tough decisions.
You can soften the blow of downsizing by giving employees a chance to prove their worth. (This is also an excellent test for a new employee, in good times or bad.) Ask him/her to explain how the company will pay their salary. You are not in the business of giving people jobs. You are in the business of giving people opportunities to make money for themselves and their employer. If they can’t tell you how they would do it, don’t be surprised to discover that they have become cash consumers rather than cash generators. Each employee in your company needs to be cash positive, and they need to know how and why.
Push the Envelope
Finally, you need to focus your attention on what must be done rather than what you like doing. We all have our comfort zones, but if your comfort zone isn’t generating cash it’s time to step out of it. The job is to generate cash, not new products, new customers, new techniques or new empires.
Strip your business down to the basics: produce and sell. Then do the basics with the fewest inputs possible: materials, labor, energy, capital and support. Like any game, begin with the fundamentals. Save the fancy plays for more prosperous times.