Chances are, it’s going to happen to you. Nearly all businesses eventually have to face some very hard decisions due to cash flow heart attacks. In the construction sector, for example, 87% of execs said they experience cash flow issues regularly, with nearly 1 in 5 saying that cash flow blockages are a permanent way of life.
The likelihood and severity of your cash flow challenge will certainly vary based on margins, the industry profile, and your growth stage, but it would be a mistake for anyone anywhere to underestimate how serious cash flow issues can be or how quickly they escalate. The National Federation of Independent Businesses reported that 82% of businesses that failed cited inadequate cash flow management as the proximate cause.
Consider the big picture. In most businesses, especially retail, customers come and go in random clumps, while bills arrive in waves of deadly regularity. It’s no wonder why business models like SaaS, IaaS, chicken-treats-as-a-service (seriously), and anything-else-you-can-think-of-as-a-service have grown so popular.
Although locking in periodic revenues streams can stabilize cash flows, too many company leaders have put too much faith in subscription services. Birchbox is the perfect example of a successful subscription service that came unglued for a variety of reasons, including cash flow crunches as their costs rose faster than their revenues.
At the other end of the spectrum is a company with more than a century in operation, offices in 170 countries and a market cap of $130 billion – and their biggest threat, according to Credit Suisse analyst Kulbinder Garcha, is cash flow. While IBM is not on the verge of bankruptcy by any means, some evidence suggests it could very well disappear by 2030 unless there are significant changes to its fundamentals. Many of us have seen the fall of giants like Kodak, Andersen Consulting, General Foods, and many more in the past two decades, so it’s not unthinkable. What’s more, new evidence suggests that nothing lives forever.
Large scale data analysis demonstrates that company lifespans have shortened dramatically in recent years. The American Enterprise Institute (AEI) noted that 88% of the companies listed on the S&P 500 index in 1955 were not there in 2016. Projecting out the accelerating churn rates, they suggested that half of today’s top companies may not exist in their current form by 2034, and all of them by 2051. Like the humans who run them, companies are mortal. The real question is how healthy your firm will be during its apportioned lifetime. One pathway to wellness is to strengthen your company’s heartbeat through smarter cash flow management.
The following is true story, and one that we commonly hear.
A firm came to us bleeding cash. We had to find a way to stop the outflow first, then present them with a plan for occupational therapy to rebuild their customer base.
Of course, there are a functionally infinite number of options in the real world. The point is that these four cardinal directions represent the most common reactions:
There are times when each of these might be your best option, but in this case we started with A) - stop spending on the largest avoidable costs while prioritizing revenues until the books can find balance. Marketing isn’t always the smartest place to make the first cut, but an intelligent application of spending cuts will haves the biggest impact in the shortest time window for plugging up cash flow losses. Over the longer term, rebranding and strategy evaluation might be the right direction to go, but not under such intense pressure.
After you’ve applied a financial tourniquet, it’s reasonable to turn your attention to revenue. That means re-engaging employees who may still be in shock and strengthening the relationship with your best customers, who are the ones most likely to bring new life to the business with referrals and brand advocacy. Look through these mini-case studies from the real world to see how well your thinking matches that of leaders who successfully turned things around.
The Lesson in Free Samples
A consumer goods company drove sales of their primary product by giving away free samples of various other items as a promotion. One promotional extra drove a massive amount of sales. Would you:
Did you choose B? That’s exactly how Wrigley transformed from a soap maker into the predominant force in the global chewing gum market.
Renewal in Personal Care
An OEM of personal care items found its revenues stagnant as costs rose and its main customer base continued aging. Would you:
Few have changed so many minds so quickly as Old Spice with it’s bizarre YouTube videos that captured the zeitgeist of a generation and far surpassed their goal of doubling revenues.
A Fork in the Road
A well established hardware technology company is bleeding cash and heading toward irrelevance beneath a tide of innovative competitors. Would you:
If you immediately recognized Mac vs. PC strategies, you could run the second $1 trillion company in the US (you better hurry because Amazon is only $50 billion away from earning that title). Cutting hard and deep isn’t always the best idea, but Steve Jobs cut intelligently. He eliminated all the products that Apple didn’t excel at, including the proto-iPad called the Newton PDA. A narrow concentration on core excellence, an ad campaign centered on Apple’s vision (Think Different), and a painful cash deal with Microsoft cut their operating expenses in half and returned the firm to profitability.
Although this blog has been an extreme close-up on cash flows, there are many other organizational systems that must be kept in balance to achieve financial wellness. We’ll help you do an auto-check-up on those systems in upcoming blogs. In the meantime, we’d love to hear your stories of heart-stopping breakdowns and dramatic turnarounds. Smart business leaders have an uncanny ability to learn from their mistakes, but most would tell you that it’s a better plan to learn from the mistakes of others.
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