In the early days of my working life, one of mentors shared with me two business lessons he had learned the hard way in his early career, and put them in 2 short sentences I would never forget:
“Cash is King!”
“Only the topline matters …”
Although it is clearly an oversimplification of how to manage a business, it does carry a lot of validity:
Cash is what pays the bills, the salaries, the products or services the company requires to operate, and repays the outstanding debts, amongst many other things. It is fuel in the engine of the corporation. It does not matter how much profit the books show, if the company runs out of cash, in many cases, the end is near (if not there)
Although I originally struggled with the concept of “only the topline matters”, it made a lot of sense to me once the underlying concept was explained. Of course, there needs to be sufficient margin to build a profitable business, but margin is built as a result of sales. It is the engine of the corporation: unless the company sells and generates revenue, there will not be any creation of margin or value, it will be stuck with only its fixed costs, without any progress. One can always cut the fixed costs, but at some point, there is nothing more to cut, as there is no more company left
I have been thinking about those 2 lines quite a bit over the past few months: the Covid-19 crisis has run havoc throughout the global economy and a large number of companies have been left scrambling for survival, because of dropping sales and lack of cash. Depending on the sector and/or location, governments have stepped in to support their local economies and businesses, but in most countries this support is finite and will most likely end in the next 6 to 12 months, if not sooner. At that point, all businesses will need to survive on their own strengths, bringing forward the questions if they are able to generate enough sales (and consequently, cash) to continue operations …
The biggest challenge for all companies going forward will be to adapt to the new reality in their respective industries in a post Covid-19 era. Most, if not all, industries will see significant change in customer behavior and requirements, resulting in changing buying patterns and fulfillment options. Companies will need to adjust to the changing market conditions and look for innovative ways to continue to meet their customers’ evolving needs. Only then will they be able to generate the necessary sales (and cash) to survive, leaving companies expecting “things will go back to normal as it was before” extremely vulnerable and exposed. If history has taught us one thing, is that every crisis has been the breeding ground for innovation and disruption, and this is a major crisis …
At the start of this crisis, the focus has been on cost cutting and cash preservation, and rightfully so. As mentioned, and because of this “cost-focus”, many countries have developed emergency programs, supporting businesses and employees in various ways, so the cash crush could be limited. However, this also came with an inherent risk: to a certain extent it has masked the urgency for companies to innovate and change, leaving them potentially exposed for the future. When governments’ subsidies end, all companies will need to be able to self-sustaining, i.e. will need to be able to address an economic environment that will look significantly different, and generate enough sales and cash to survive without further support.
If it has not been done yet, board rooms and executive offices of every company need to look urgently into the organization and evaluate its situation.
How is the business segment evolving that the company operates in (related to client requirements/needs, fulfillment, innovative ideas, cost structure, …)?
Is the business ready to face this changed environment, have the opportunities and potential challenges been identified?
What is the company doing to change and/or innovate to address these opportunities / challenges, and who is being engaged to work on this project (internally & externally)?
Is the business ready to generate sufficient sales & cash going forward, and if not, what will it be doing to ensure business continuity (in the short and the long run)?
How do the sales levels look in comparison to the cost base and how can this be improved upon?
These are only a few of the crucial questions every company needs to answer. These are existential questions, meaning they should be top of mind at all times, but in the current environment these are more prevalent than ever before: if these question do not get answered quickly (meaning in a matter of weeks at the latest), my mentor’s hard-learned life lessons will re-emerge for those ill-prepared companies:
No sales, no cash
No cash, no business
If you want to learn how I2ACT’s interim management or consulting solutions can help with changing and positioning your company towards the future, contact us via email or give us a call.
Comments