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Anatomy of a cash crisis
December 8, 2014 | By Neil Ducoff | 4 Comments
For entrepreneurs, there is nothing more dreaded and stressful then going through a cash crisis. Much like the “battle stations” siren on a warship under attack, a company experiencing a cash crisis instantly goes into reaction mode to batten down the hatches and plug the leaks. The truly tough work is keeping a “business as usual” demeanor to avoid freaking out employees and exposing customers to the crisis that is occurring just behind the curtain. Unfortunately, the more critical a cash crisis gets, the more it impacts employees and the company’s ability to deliver its standard of excellence to its customers.
A cash crisis follows a very predictable path. First, new purchases are cut back to only the “gotta have” items. Then, current expenses are evaluated and trimmed. Travel expenses and perks are slashed or eliminated. Advertising and marketing costs are scaled back or tossed out. Eventually, payroll costs are reduced by trimming hours, implementing layoffs, or resorting to the culture-crushing tactic of payroll reductions. Depending on the severity of the cash crisis, the company’s owners may be forced to significantly reduce their salary – or sacrifice their paychecks entirely so employees can continue to get paid. All of this is extremely stressful and falls under the heading of “making tough decisions” to get out of the fiery pit of hell.
If it hasn’t already, sooner or later your company is going to experience some degree of a cash crisis. Here are some No-Compromise strategies to remain vigilant, identify and possibly avert a cash crisis in your company:
- Early warning signs: Many entrepreneurs make the dangerous assumption that being hit by a cash crisis is much like being hit by a tornado in a strike with little to no warning. In reality, a cash crisis is more like the evolution of a hurricane that begins as a tropical depression and intensifies in stages into what can be a killer storm. Unlike a tornado, a hurricane can be tracked with predictions on its path, point of impact, expected damage and essential evacuation warnings. Simply put, you know the hurricane is coming and have time to prepare. A cash crisis festers and intensifies over time. The early warning signs appear on your Balance Sheet in the form of decreasing cash, increasing accounts payable and increasing debt (usually from credit cards). If you’re not paying weekly and monthly attention to these two financial reports … your cash crisis will feel like a tornado when it strikes.
- Unjustified “justified” expenses: I’ve never met an entrepreneur that couldn’t conjure up some hair-brained “justification” for spending money the company cannot afford. Most often, it’s the, “We need to do this,” high-risk impulse decisions that seed the cash crisis. Sometimes it’s the result of over-confidence, ego and invincibility feeding these high-risk decisions. It can be embarking on a major expansion the company has neither the resources nor the capabilities to manage, or it can be hiring a hotshot with a big-shot salary that fails to perform the expected miracles and instead saps cash by driving payroll through the roof. If it feels high-risk … it is high-risk. If any business decision is going to stretch your cash and your financial position into the high-risk zone, you need to put the brakes on and deeply contemplate the downside of the risk. Hey, maybe your hair-brained idea is pure genius and will guarantee you entry into the “I bet the ranch and won” Hall of Fame, but are you willing to bet your company, home and personal assets on it?
- Duration is controllable: Yes, being in a cash crisis is painful and stressful. However, the duration of a cash crisis largely depends on you and your leadership. The first absolute to remember is that a cash crisis doesn’t just go away or fix itself. Performance behaviors, spending decisions and not paying attention to your financials and cash-flow management are what got you into the cash crisis. Therefore, changing your company’s performance behaviors and spending decisions … and giving intense attention to your financial reports and cash-flow management … is a non-negotiable when it comes to pulling yourself out of a cash crisis. Translation: The sooner you read and understand the warning signs and adjust accordingly, the shorter the cash crisis. Another way to look at this is that the corrective decisions made at the very early stages of a cash crisis are significantly easier than those made when the cash crisis evolves into a fiery pit of hell.
- It’s about balance and discipline: Avoiding a cash crisis, or working through one, is more about leadership and fiscal discipline and less about your entrepreneurial spirit. In fact, your entrepreneurial spirit is the culprit responsible for most cash-crisis situations. Think of your entrepreneurial spirit as the creative, innovative and passionate side of your work. Now, think of your leadership and fiscal discipline responsibilities as the “manage risk and keep out of trouble” side of your work. If your entrepreneurial spirit is in charge all of the time … you’re in for an exciting, edge of your seat, business thrill ride. If your leadership and fiscal discipline side is in charge … you’re tight with cash and risk averse. Find your balance in both and you’ll also find yourself willing to take calculated risks … risks that don’t compromise the company’s cash position.
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