Daily Leadership Thought #176 – Don’t Run Out Of Financial Runway
Every business needs to have a sense of its financial absorption capacity.
There are always three rings of business casualties during every recession.
The first round eliminates companies or individuals who are market opportunists. They ride the wave of market growth and exist to meet unmet demand, not because of any skill or acumen. It is a simple market correction when they go out of business.
The second wave ultimately hurts otherwise solid companies that, unfortunately, made one or two major mistakes. In a shrinking or more competitive market that was less forgiving, they made the wrong call or mistimed their actions.
Lastly, there is the third and final round: those companies that run out of financial runway. They’ve hung in there, made no major mistakes, and done their best to stay ahead of the curve; however, the market doesn’t recover fast enough for them to become sufficiently cash flow positive and service their debt obligations and/or invest in business development.
For some reason, we’ve become increasingly myopic in our business thinking these days. We frequently overlook past lessons and adopt a short-term financial outlook. Business cycles are cyclical. Recessions are a fact of economic cycles. Knowing this, business leaders need to be cautious about not withdrawing too much cash from the business or incurring excessive debt. The fundamental economics of your business must work. We expect for-profit companies to generate a surplus and maintain a positive cash flow. The goal should be to grow, not contract, the economic value of the business and build owner/shareholder equity. Additionally, lines of credit should be repaid. I’m worried that far too many leaders run their businesses by always maximising short-term debt. Remember, this money costs money.
Every company should be run profitably. We should then set aside a portion of this profit for future emergencies or needs. This should become the standard approach to managing your organization’s finances. Don’t overburden your business with too much overhead. Always strive to keep your operations lean and efficient. All significant cash investments should have the expectation of a return on investment (and don’t wait too long to see this return). Be cautious about how much you pay yourself or withdraw from the business. If you reduce your cash holdings to minimal levels for tax purposes, ensure you can access it in other ways.
I realize it’s challenging to think long-term, plan for contingencies, and delay some level of financial gratification, but in today’s economy, it’s a business imperative. Our business world is becoming increasingly complex and less forgiving. Don’t defer your fate to the decisions of others. Hope is not a strategy. It’s an emotion that leads to disappointment in money matters. Instead, please focus on mastering the financial basics. Do your best to ensure that you are consistently cash flow positive, have a strong balance sheet, minimize debt obligations, and have the financial capacity to weather any major financial storm. It’s also always smart to plan for and be proactive about managing through economic cycles.
Related articles
- How Do Businesses Manage Cash Flow? (thinkup.waldenu.edu)
- Become A Cash Flow Creator (nacmwrcc.com)
- Managing cash flow – a guide for small business (premierlinedirect.co.uk)
- Ten ways to optimize cash flow (business.financialpost.com)
- 5 Common Small Business Accounting Mistakes (grasshopper.com)
- What Is Cash Flow And Four Powerful Apps To Help You Manage It (forbes.com)
- MBA Mondays From The Archive: Analyzing Financial Statements (avc.com)
