Now, I understand this is advice you might have heard from your grandfather, or his father, or someone who endured the Great Depression of the 1930s. Thing is, it is still true. Thing is, we are in a similar state to that condition of the 1930s, and recovery will take some time (years) yet.
It is best to have a minimum reserve of one year of your company’s basic costs on hand at all times. This reserve can be invested when it isn’t needed, of course, but it should be invested so that you can get to the funds in a matter of days without penalty or loss. This will represent one of the more conservative pockets of your (or your company’s) portfolio. If you are just starting a new business, it is wise to have more than one year’s cash reserves.
Now, I understand this is not simple to do. It requires 1) a real understanding of your costs, 2) accurate investment plans for expansion and the return (and timing of that return) on that investment, and 3) a discipline about what is necessary to drive profitability in your business.
1. If you do not have a gift for understanding the financial aspects of your business, then do not begin, or continue, until you have someone you deeply trust to handle these, someone who will confront you with the reality of the consequences of your financial behaviors as soon as he or she sees them. This trusted advisor must make you learn what you don’t know – how to assess what happens when balance sheets do not balance, when costs exceed revenue, when profitability is lost.
2. Take care when planning to expand. Expansion is based on assumptions – continued revenue growth (sustainability), a stable or growing world economy, a lack of competition and/or market disruption in your market space, and so on. Make sure, once you have made the exciting best-case scenario, to sit with your financial advisor and look at an average-case and a worst-case scenario. Look at the consequences of these, particularly the average-case. And ask yourself – if the average case is all I gain, and perhaps it cannot be sustained, what does today’s risk look like then? Is it still worth taking? How long will the return on the cost of this investment take to actually hit your books and have an affect on your profitability? Can you trust stable market conditions to sustain your company until that time? If not, what does today’s risk look like? Draft a series of these questions, and consider each with your CFO.
3. Above all, focus your growth or maintenance on profitability, not only on top-line revenue. Without profitability, top line revenue will not sustain your company through the vagaries of the marketplace or the next downturn or an unexpected disruptive competitor or a sudden change in the price of a required component. As CEO, it is your discipline that drives your company’s future, the security of your employees, and your competitive position in the market.
Your commitment to profitability will create a “lean” company, even if that company is growing in market share, and in its bottom line. The minor details of profitability might surprise you. Much of the new leanness is knowing what you have, that you do not need. Automation and software now handle an unusual amount of what was once manual labor, if you will only implement it. Administrative systems can be simplified more every year. Off shore support can save a great deal, if it is well-managed. Eliminating internal “silos” and flattening the organizational chart may work for you. Asking your team for ideas to streamline processes can work, especially if these ideas are tested and incorporated.
And if you are contracting in this recession and not expanding, you are more aware of the bottom line than ever. Perhaps for a year or so you can only manage break-even, or use a portion of your reserve, while preparing for the next uptick in the economy or the new change in the marketplace? Take some time to think and play “what if” games. What if it was only you left? Or a core team like when you started out? What if you simplified your product line? What if you re-priced and re-positioned your services to current market needs? What can you do without, to drive to profitability. Smaller and alive is better than bigger and gone.
The same discipline is required during both growth and contraction. And the financial discipline to keep your company safe goes on, year in and year out.