Over the past three months I’ve written about five tips for struggling businesses. During my own career, I’ve had my share of dealing with stressed businesses—from the original Krementz, to William Schneider, to JCK, and finally the dramatic decline in the diamond business beginning last year.
Each firm had its own unique set of problems, but they all come back to management: The people. The decisions. The timing of the decisions. At the end of the trail, the decisions we make or fail to make as managers determine the fate of the business.
At Krementz, it was too much inventory and too much borrowing combined with an overhead structure that was too large for the size of the business. At Schneider, it was a bad business model relying on novice sales personnel to replace a professional sales organization. JCK was the one bright light in the troubled seas, where we overcame a significant competitive threat because senior management believed enough in the business to support it during a particularly adverse time.
Each time, the business problems all reduced down to a single problem: cash.
We never know when a downturn becomes a serious business problem until it’s upon us. At that point—in most businesses—it’s too late.
The fifth and final tip I offer may be too little too late, but should you weather this current economic storm, it will prove useful for the next. Every business needs an emergency cash reserve. This fund should be large enough to provide basic operating expenses for the business for a full year. The concept is comparable to basic personal financial planning where we are advised to have at least six months salary in reserve in the event of a job loss.
How many firms do you know that have enough cash reserved to see them through a tough time? I’ll bet not many. Usually, it’s only when the bankers begin calling loans or the “suits” at corporate begin ticking off forced cost reductions or you begin to have to factor your receivables that you begin to understand the importance of cash management and having a cash reserve to fall back on.
Today, the problem is severity and timing. The results are bankruptcies, forced liquidations, and terminations of key players in every segment of the industry.
When business returns to a more normal state—and it will—you will do well to remember the sage advice of having that rainy day fund for the next time.