The Strategy Addict | “Take a Look In The Rear-View Mirror, Learn From the Past” is part of a series of articles written by Shane Snively.
They say accidents happen when you look in the rear-view mirror, and it’s true that paying too much attention to the past is a bad idea; I love the Allstate Mayhem commercial where the guy is being tailgated and spends so much time looking behind him that he does not see what was happening right in front. Crash!
But cars have rear-view mirrors for a reason.
Business owners need to look into the past a little to be prepared for the future. Yes, this current crisis, the one caused by the coronavirus, is a crisis like no other, but then are not most crises unique in some way? We can still learn from the past.
I learned in the US Air Force to be so diligent in planning that we would be prepared for any variable that could be thrown at us. Paradoxically, one way we learned to prepare for the unknown future was to study the lessons of the past.
So, let’s stop take a look in the rear-view mirror. If you’ve been in business over the last 20 years, you will remember these challenges:
- The Crash of 2002
- The 2007 – 2008 Financial Crisis
Nowhere was there a global pandemic like this one. Never did we have to basically shut our own economy down in order to protect ourselves and each other from a deadly disease. But there were lessons in those events that could come in handy now.
Here is what I learned from the past, what I call the 4 C’s.
1. Cash Discipline
Everyone has heard the adage, cash is king. Unfortunately, I’ve noticed over the years more people confusing cash with having access to credit facilities, or, even worse, counting pending receivables or inventory as “cash.” These are “not” cash.
Remember, credit can be dropped or canceled, and probably will be in a serious financial crisis. Inventory can be converted to cash when business runs as usual, but not when business dries up. And clearly receivables might just not happen at all. Only cash, I’m talking liquid money in your bank account counts as cash. It’s the only form of wealth you can rely on to not vanish in an emergency.
And in emergencies of all kinds, non-cash forms of wealth, from investments to credit lines to expected income streams, were threatened, to greater or lesser degrees. It’s a problem that crises of all different kinds have in common. That’s why being able to tap cash reserves from somewhere is critical to being able to weather any storm.
2. Get Credit When You Do Not Need It
If you have three to six months of cash in the bank, it should be easy to obtain a line of credit. Credit is important because if something goes wrong you can draw on your credit and save your cash for use in case the crisis gets worse and credit becomes unavailable.
Let me say that again: cash is king because you can use it to survive in an emergency. That means you’ve got to have something other than cash to draw on in a minor crisis or your cash won’t be there when you need it. That “something” is credit. So, if you were already living off your line of credit because your cash flow is not strong enough to really support your business, you won’t be able to get through unexpected tough times.
I’m not saying cyclical companies should not be normalizing revenue through a line of credit, but ideally, credit should be a last resort. Unfortunately, often what I see is the opposite, where the credit line is used as a corporate arbitrage tool in what amounts to a game of chess. Yield spreads and vendor credits, cash pay discounts, factoring, all of that, if played wrong could hurt you. For example, say you borrowed to get a vendor credit for paying early, but your clients didn’t pay you. Now you’re out of cash and you’re wondering how to pay your people. Ouch.
The principle here is never to bet that business-as-usual will continue. Don’t rely on surprises not happening. Surprises “do” happen, as we can learn by looking in the rear-view mirror at historical crises—even the ones that look obvious in retrospect were surprises at the time.
3. Collections Care
If you have poor collections processes and are struggling with aging receivables you already behind the Eight Ball; this is looking in the rear-view mirror in a bad way, because you’re busy paying attention to past business that you can’t deal with anything new—like that car in front of you in that commercial.
Even in a normal market, in any industry, not taking care of collections puts you one missed payment or lost client away from a position of no return. And one thing the history of crisis teaches us is the market isn’t always normal. You can’t afford to put yourself in a position where everything must go right for you to succeed; not everything is going to go right!
Not all businesses have the same cash flow turns, but you should know what your industry average is and have goals and incentives put in place for your people if you beat them. And in a situation like the one we are in, your company’s survival depends on your having been a saver and not a spender.
4. Capitalizing on Opportunity
Having discipline can pay off; by doing the first three C’s often you can capitalize on new opportunities, giving you the fourth C. In some instances, you can gain market share because you are in a financial position to continue operations while others may not be. You can also gain the favor and loyalty of your employees, staff, and vendors whom you can continue to pay because you are prepared. You can be in more control of your true cost of capital, not being forced into mezzanine-type positions with lenders on unfavorable terms, or even worse, forced to give up equity to save or hold onto your life’s work.
I’m not saying the four C’s make businesses impervious to crisis. Even if you have been following all four practices, I can’t promise you that your business, or even your industry, is going to survive. But if you have been doing the four C’s (even if you’ve been calling them something completely different), you are more prepared for this pandemic than you otherwise would have been.
And if you make it out, you can look back on “this” crisis and get better prepared for the future.
Shane P. Snively, MBA, MA, CBC, RFC #thestrategyaddict
“The Strategy Addict: Take a Look In The Rear-View Mirror, Learn From the Past” was written by Shane Snively, COO of KazSource.