Get Really Real

Optimism is a beautiful thing.  Positive thinking, speaking and acting are
the core ingredients to creation. 

Contemplating undesired outcomes is equally powerful.  The key is not dwelling on negatives but being clear on the pitfalls to avoid.

Okay, let’s get real.  S*#T happens in business. The best designed strategies and tactics rarely work exactly as designed. Planning for unanticipated hiccups is part of running a company. Having the appropriate financial reserves is the surest way to ensure ongoing sustainability.

Cash flow remains king. 

The question many executives grapple with is how much cash to have on hand? The answer depends. I will, however, provide my professional opinion in a moment. First, consider human nature. CEO’s and their executives are human beings – creatures of habit. 

Having successfully turned around several businesses in the
last decade, I’m no longer surprised by the consistency of behavioral cycles.

  1. Business grows
  2. Business lacks process and disciplined management
  3. Business gets over leveraged through too rapid of expansion, over spending and generally poor cash / credit management  
  4. Business is turned around by outside experts or experienced third-party executives
  5. Once business is back on track, existing management, being creatures of habit, go back to historical behaviors and the same problems are re-created.  (Einstein’s definition of insanity.)

Fundamental to building and maintaining a successful and scalable business is having an appropriate cash reserve on hand. Cash is the equivalent of blood in one’s body.  If the blood is drained the body dies. Same for a company (or household for that matter).

What is the right amount cash to keep in a money market account? In my opinion, once a company exceeds breakeven a minimum cash balance of two months fixed expenses should be available for “emergencies.” Three months is preferred.

There are a number of factors that must be considered and all businesses have their nuances. Notable situations include seasonality – the retail industry, for example, drives massive revenue during the holidays and may “starve” during the summer months. Plan accordingly through short-term lines of credit that are paid back once added revenues are realized. 

As businesses come out of turnarounds and the blissfulbounty of cash is obtained, a common “discussion” is tax management and possible overspending…again. 

Here’s when discipline must be demonstrated. 

  1. Spend appropriate levels of cash on necessary capital expenses, bonuses etc.… to optimize people and performance
  2. Scrutinize all proposed spending – there are “wants” and there are “needs” – don’t confuse the two
  3. Recognize that spending to reduce inevitable taxes owed may result in owners reaching into their personal savings or incurring new debt if the business takes a turn. Best to build a cash reserve, pay required taxes and as the cash position builds the following year, make necessary purchases.  Naturally this will reduce taxable income the following year. 

Let’s get real. The stock market has been booming. Interest rates are at historical and artificial lows.  Inflation and unemployment is low. Nothing lasts forever. The world in which we live operates in cycles. Best to maintain optimism while preparing for the preverbal economic winter that is likely to come. 

Serve your employees and customers well. Be smart, reduce
debt and optimize positive cash flow. 

The health of your business hangs in the balance.

Oh, have a very happy New Year!