I've now spent weeks watching investors disembowel the Dow Jones Industrial Average. Both equity and credit markets have moved from getting spanked to hammered, and by all measures, these are trying economic times. The conventional wisdom on how to pull through this disaster is split: save or spend. Whichever you choose, your first priority should be to turn cash flow positive if you aren't and to stay that way if you are.
With cash flow under control, the next step is to decide how you are going to approach the current market. Will you lock down your spending, fighting to retain every last dime? Or, should you look at a depressed market as a giant sale, snatching up coveted companies or investment opportunities at a discount? There are advantages to both approaches-and risks. You've heard me say it in this column before: prior to acting, you need to decide what you want your company to be. There is no substitute for a sound strategic plan.
Make Cash Management a Priority
While most of the world loves the thought of profits, any business owner knows the importance of cash in the bank. There's nothing quite like struggling to make payroll when your income statement shows that you're making more than you're spending. Unless you have cash on hand, creditors, landlords and employees simply do not care about profitability. Thus, the cornerstone of any recession spending plan should involve cash flow management.
Of course, the most powerful cash flow lever to be pulled is one that you can only influence-accounts receivable. This starts with clearly defined payment terms, penalties for lateness and a commitment to collecting, and it may involve difficult conversations with a source of revenue from time to time. If you've been waiting for a reason to become stricter in your collection efforts, the current economic climate gives you all the justification you need. Not only do you have obligations to meet, the likelihood o a client's collapsing increases when market conditions turn for the worse, increasing the likelihood that payment will never occur.
Cash flow optimization is the next step in this process. Once you have it, you want to manage it effectively. Managing the balance of collection and payment can be delicate. Principled business practices should not be sacrificed to collect a few extra days of interest. You can take subtle and ethical measures, however, to eke out some additional income. The most important is to set an accounts payable schedule (e.g, making payment in 30 days). This can be a bit more complicated than paying bills on a set day (such as the last day of the month), but the benefit is that you hold the cash a bit longer. Also, hunt for a business checking account with the best terms. You should get something for all the extra fees that business accounts entail.
Private bankers are probably ready to fight for your business in this market; their clients have probably sustained losses-which means the bankers have sustained losses. They will go the extra mile to pick up your business, often offering features not available from the bank on the corner.
Batten Down the Hatches
Once you have optimized your cash flow to the extent possible, it can make sense to protect the benefits of your hard work. Slash spending, defer growth plans and focus on maximizing earnings instead of trying to beef up revenues. The benefits are pretty obvious. A business that isn't spending too much will have wider margins that are easier to protect. Investing in growth involves the risk that the plan will fail, meaning that the cash committed is lost. When conditions improve, a failed investment is easier to absorb.
Sequoia Capital, a prominent venture capital firm, has emphasized this message to the companies in its portfolio. In a presentation leaked by Silicon Valley gossip blog ValleyWag, the firm delivered four brutal instructions: manage what you can control, focus on quality, lower risk and reduce debt. Notice that three of the four points involve financial management. The notion of investing contra-cyclically (i.e., pursuing growth while the market is struggling to survive) is not encouraged. This advice is packed with common sense.
The primary message offered by Sequoia under "manage what you can control" is spending. A company cannot flip a switch to increase consumer purchases, and there is no magic wand that can move interest rates. A firm can control the checks it writes, at least to some degree. There will always be operating costs that are unavoidable, such critical employees, technology infrastructure and marketing. The key is not to over-invest in operations. Plan each promotion carefully to maximize results for as low a cost as possible. If you are going to invest in a new server, make sure there is an impact to the bottom line. Investments that will take more than a year to pay for themselves should probably wait.
Watching what you spend is inextricably linked with risk mitigation. By simply owning or operating a company, you assume a considerable amount of business risk. It's hard enough to win out there, the message dictates, don't complicate the matter unnecessarily. The easiest way to make your job harder is to compound your risk-by pursuing new ventures. For now, hoarding capital and waiting for the economic climate to stabilize appears to be the prudent move.
Remember the days when credit was cheap? You could borrow plenty of cash with few restrictions at a low interest rate. Well, those days appear to be over. In addition to substantial efforts to unwind themselves from the risky loans they have extended over the past few years, banks are generally clamping down, making it difficult to access additional cash to fuel new ventures. The money you have already borrowed ... you're stuck with it. As you realize every month, the interest you pay is an additional expense, and it is one you probably don't need right now. Sequoia advises reducing the debt you carry, as it will lead to a cost savings down the road.
Swing for the Fences
There is some wisdom to the large venture capitalist's guidance to its portfolio companies, but this is by no means the only perspective available. Some see an opportunity in today's market, one which may warrant more aggressive investments in growth in order to seize market share at prices that are effectively discounted given the state of global financial markets. Milton "Todd" Ault III is among the champions of this approach, as his attitude prior to the market collapse was that a bear market offers a chance to buy cheap. He parlayed the advantage of having capital when others don't into several acquisitions-from printed content to online distribution.
Yet, when asked which approach companies should take now, particularly after the collapse of several financial institutions, Ault was a bit more cautious. "A market meltdown is dangerous," he explained, citing the current market's volatility and penchant for steep price drops. The answer, he believes, should be determined on a case-by-case basis. Many factors, including a company's current cash on hand and near-term business prospects should be considered.
For the right companies, taking advantage of a depressed market can make sense. If you have capital in this market, put it to work, the thinking goes. Struggling companies, desperate for liquidity or an exit strategy, may submit to an acquisition at surprisingly favorable terms. New lines of business or major client acquisition programs should be less expensive, as suppliers are likely to extend deals in order to establish a relationship that will grow when the market turns-or simply to move product in the near-term.
It All Comes Back to Cash
The decision to spend or invest ultimately depends on your access to cash. If you are held hostage by receivables and gaze longingly upon paper earnings, all the profitability in the world will not enable you to invest in growth initiatives. Thus, to survive the global economic crisis, survival should be first priority ... but it should not be the only one. Once any cash flow problems have been addressed, it is time to make the tough decisions.
It can be tempting to take advantage of a difficult market to capture a bit more market share or launch a new initiative. Vendors and acquisition targets tend to offer more favorable terms, and longer-term deals can extend the savings well into an economic recovery. While the competition is bracing itself, the benefits of investing in new growth measures can be magnified.
But, it's called "investing" for a reason. There are no guarantees.
Pursuing high-risk opportunities is rarely prudent in an economic downturn. The likelihood of failure is high, depleting cash that could have been put to better use. Thus, now is the time for smart investment. Focus on the little victories, which will be expanded by those who gamble and lose. The result will be a solid platform from which to grow as the recovery begins.
This article originally appeared in the February issue of AVN Online. To subscribe, visit AVNMediaNetwork.com/subscribe.
