As a business leader today, you have the unprecedented challenge not only of surviving, but accelerating through, the worldwide economic downturn. Credit is scarce, sales forecasts are depressing, unemployment is rampant, and the morale of remaining employees is sinking fast. To make matters worse, we are adrift at sea in a squall of epic proportions and no one seems to have a compass to navigate out of the eye of the storm. When we do eventually emerge, we have no idea where we will land or what the conditions will be. What we do know, is that this is a time of turbulent change worldwide – and with turbulent change comes both opportunity and risk. As people look to you for strength and guidance, you can be sure that you will be tested like never before. How you manage the ongoing crisis will have an enormous impact on your employees and your organization.
As the Captain of your ship, will you be the leader who seeks opportunity in chaos? Will you see the changes coming before others, put up the sails, and move faster than the competition? Will you ensure every business function, in every region, is aligned and coordinated so that everyone is in the same lifeboat, rowing in the same direction? Will you engage risk as a critical component of opportunity? Are you willing to rethink your strategy, so that you are financially agile and able to engage the opportunities the markets offer in times such as these? Or…not?
In recent times, the importance of holding cash has often been overlooked. However, as we struggle to stay afloat in rough seas, the best opportunities often reveal themselves when credit is tight and access to capital is limited. Cash allows access to hidden treasure – providing a mechanism to take advantage of market downturns when other investors are cash poor. The more cash is accessible, the better a company is able to gain access to capital and investment markets with a lower rate of borrowing for capital expenditures, acquisitions, or share repurchase.
Throughout the world, businesses are being forced to re-think how to operate in an environment where cash, once again, is king. The ability to adapt to the changing tides remains a crucial competitive advantage – and for the foreseeable future, that competitive advantage is most accessible to those aggressively managing cash as a critical metric. Given today’s technology, there is no excuse for any leadership team not knowing the corporate cash position, across the organization, every day.
As you attempt to keep your eyes on the horizon, revenue growth is not the benchmark it once was. Now, every leader with financial responsibility must consider cash flow implications as part of the decision making process. That doesn’t mean savagely cutting all costs and hiding below decks until the storm has passed – good investments should be made, however any cash expenditures should be carefully scrutinized and evaluated from three internal perspectives: earnings from operations, working capital, and the sale of assets. Sales should be weighed not so much by margin, but instead by how much inventory and receivables will be tied up and for how long. Projects previously evaluated on ROI, must now also be judged in terms of how much cash they consume vs. how much they can generate – and how soon they will actually bring in a return.
As leaders navigate their way through turbulent environments and confront the inability to secure capital due to increased credit restrictions, those who shift from a focus on the income statement to the balance sheet and cash reserves will triumph – coming out of the economic downturn much stronger, and more competitive, that ever before. While top and bottom-line growth are important, the necessary condition to fuel growth is the availability of cash. As we are all well aware, even profitable companies can find themselves submerged in rough seas if they are not aggressively managing their cash. Although a critical success factor in its own right, profit is an accounting principle – bills and employees are paid with cash, not profit. With the ongoing financial crisis, companies that want to survive the storm had better hold onto cash as if were a life preserver, and declare credit dead weight. Those who ignore the need to refocus and neglect their cash flows may find themselves in Davy Jones Locker – as permanent residents!
How has your company changed the way it manages the financials in turbulent times?
Please engage the discussion and let us know how you stay afloat in rough seas. Please feel free to contact me at Sheri.Mackey@LuminosityGlobal.com or by visiting our website at www.LuminosityGlobal.com. Check back next week for the next post on Leadership Across Boundaries and Borders.