Riddell: Zero sum
May 3, 2016
Every business knows all too well the slogan "Cash is King." But the real meaning of this requirement becomes even more acute in areas that are subject to significant swings in their business cycles. Certainly quite a number of businesses in Grand County know all too well the puts and takes of our "normal" cycles. This having been said, there are only two solutions to address a potential cash flow shortage. The first is to simply generate more, the second is to simply use less. In this regard, however, "simply" sometimes gets totally lost in the management of the business.
Let's first take a look at the area of "generating more." Please remember, the goal is to generate more cash. Cash is not the same as profitability. Cash is what you pay your vendors; cash is what your customers pay you. Cash is what is in your wallet and/or checking account. Profitability is simply a scorecard for how you run your business. Said differently, you can have an extremely profitable business, but if your checking account has no cash in it, you can't pay your utility bill or rent or employees. So generating more cash in this down time often requires squeezing historical profit margins, usually through lower prices. The thought here is that through lower prices, we might bring in a few more customers, a bit more revenue, thereby minimizing the anticipated drop off in cash. The fly in this ointment is that if you don't get the desired volume, you can end up with even less cash. So a smart marketing plan is a given. Having this smart marketing plan focused on locals is also a given.
The second strategy of cash management of using less is more than just cutting back on spending. While this is certainly a component, savvy managers get out in front of anticipated cash shortages by negotiating reduced costs with their vendors before the crunch hits. These reduced costs can be an actual reduction in price but it could also be better payment terms. Some landlords might be open to a schedule of seasonal rental rates. You never know until you ask, but all landlords have a vested interest in keeping viable tenants. Viable tenants are always cash positive.
Now clearly the successful business manager will employ a bit of both approaches as appropriate for his or her niche. These are not "either/or" tactics. But it is important to recognize that the shoulder season does present one other challenge for cash sufficiency not present during the rest of the year.
The boom times are generally good for everybody and the reason they are generally good for everybody is that there is simply more than enough cash generation for everybody. While everybody may not enjoy the same level of success, this volume alone can hide a number of issues. But when the volume dries up, the phenomenon known as "zero sum" comes into play. Basically, this says what business I get, you lose, and what business you get, I lose. Suddenly there is simply not just enough for everybody. So now cash generation becomes zero sum. The losers can quickly go out of business.
Every business has to deal with cash flow. The professionals manage their cash instead of letting their cash manage them. They also tend to sleep better!
Following a successful international business career, John Riddell turned his attention to small business/entrepreneurial pursuits that included corporate turn-arounds, start-ups, teaching, authoring business and sports columns and serving as VP for the Chattanooga Chamber of Commerce directing its Center for Entrepreneurial Growth.
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