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Daily Leadership Thought #176 – Don’t Run Out Of Financial Runway

July 19, 2011

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Every business needs to have a sense of its financial absorption capacity.

There are always three rings of business casualties to every recession.

The first round takes out the 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 ends up hurting otherwise solid companies who unfortunately made one or two bad big decisions.  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 who simply run out of financial runway.  They’ve hung in there, not made any major mistakes and done their best to be 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 often forget the lessons of the past and live with a short-term financial perspective.  Business cycles are cyclical.  Recessions are a fact of economic cycles.  Knowing this, business leaders need to be careful about not taking too much cash out of the business or hedging their future on too much debt.  The basic economics of your business needs to work.  For profit companies are supposed to generate a surplus and be cash flow positive.  The goal should be to grow, not contract the economic value of the company and build owner/shareholder equity.  In addition, lines of credit should be paid back.   I’m worried that far too many leaders run their business by always maximizing short term debt.

Every company should be run profitably.   A portion of this profit should then be saved 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 do your best to keep your operations lean and mean.  All significant cash investments should have the expectation of a return on investment (and don’t wait too long to see this return).   Be careful about how much you pay yourself or take out of the business.  If you take your cash down to minimal levels for tax purposes, then make sure you can access it in other ways.

I realize it’s hard 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, get the basics right.  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