Wise words from the mountaintop—Part 10

Cutting expenses to facilitate cash flow, Reversing the equity-into-debt trend

The FABRICATOR October 2004
October 12, 2004
By: Gerald Davis

Editor's Note: This is the tenth episode in a mountaintop dialogue that Gerald has been having with a "wise business guru." They have been talking about understanding that your niche is only part of the strategic planning job.

"Remind me of what you have tried so far to improve your cash flow," my guru encouraged me.

"Wow. That is a pretty long list. I have borrowed money, tried increasing sales, changed customers, and raised prices," I replied.

"What about reducing expenses to match your income? You know, live within your means?" he asked.

Well, of course!" I snapped.

"But you still have a problem. Sounds to me like you are deluding yourself when it comes to necessary expenses. That, and you are not using your cash wisely."

Freeing up Cash Flow

It was true that my cash was tied up in raw materials, work-in-process, and finished goods. I understood that I needed to rewrite my strategic plan and develop adaptive policies to keep the company on course as the business environment changes. I had to figure out where the major cash flow problems are and attack those first. But now, he was telling me that I am deluded!

"I am not deluded!" I protested.

"Are too!" he asserted.

"Prove it!" I demanded.

He handed me a D&B™ Business Scope® report on my company.

"How did you get that?" I exclaimed.

"I bought it online. Anybody can," he said with a smile. "Looks like the economic performance of your company has declined for two years in a row. You have been converting equity into debt to fund your operations. Your staff and facility have remained constant while your utilization has declined," he said as he flipped through the report. "You clung to a growth plan when the national economy was entering a recession."

"You make it sound worse than it is," I protested. "Sure, things have slowed down a little, but everything is ready to kick in as soon as the economy recovers," I claimed.

Looking to the Economy for Rescue

He shook his head as he gazed at me with an amazed expression. "How long are you willing to wait for 'The Economy' to save you?" he asked.

I laughed. "I really expect it to pick back up in the next quarter," I said.

He looked thoughtful for a moment. "The computer business got a real boost in 1999. The Y2K scare tricked a lot of people into upgrading their computer systems. The Internet Illusion helped the telecommunications industry for a while. The boom times gave state and local budgets a pile of fun money to spend. The problem is that it was valued at prices that reflected the inflation of the currency, not the growth in earnings.

"You, and most of the rest of the manufacturers in the U.S., borrowed heavily against the inflated value of assets. The subsequent deflation was sudden and unexpected and left you gasping for cash to service the unproductive debt!" he growled.

"Once the consumer spending on PCs slowed, there was a glut in electronics manufacturing. In an effort to improve their economic status, many firms moved their manufacturing out of the U.S. and into cheaper labor markets. Several telecommunications firms overbuilt their wide-bandwidth capacity and are simply waiting for demand to catch up with their supply. The recession also has changed government spending," he continued.

He paused and found a chart in my business plan that showed the major industry segments that we traditionally serve. "Computer equipment, telecommunications, and law enforcement represented 60 percent of your sales five years ago. How much does it represent today?" he asked.

"Not anywhere near that," I sobbed.

Overly Optimistic for a Rebound

He looked at me with sympathy. "Do you think the work that moved offshore is going to come back in the next quarter? Do you think the demand for semiconductor manufacturing is going to change in the next 90 days? Is the government going to stop airport screening and suddenly start purchasing a bunch of speed guns?" he asked.

I shook my head no.

"Then why in the world are you optimistic that the economy is about to rebound in your favor?" he demanded.

"Maybe something good will happen now that the elections are over?" I suggested.

"You were optimistic about the economy during the campaign season! You are letting your dreams lead your thinking instead of facing reality," he accused.

He might be right. My customer base had eroded and was never coming back! I owed more that I could bear on machinery that was aging rapidly. He noticed that I was beginning to fret.

Listening to the Economy

"Now, be brave, my ingenue. Not all of your customers are gone. In fact, the economy has sent you a very positive message!" He seemed delighted.

I was astounded. Where was the sunny side of the story to this litany of woe? "I certainly am not seeing the good news here," I sniffled.

"I repeat, you still have customers!" he shouted. "As always, the market has told you how big your company can be. It is not telling you that your company cannot be. It is just telling you that, right now, your company should be smaller," he announced.

I felt slightly more optimistic, but still confused. "You are covering a lot of ground in a hurry. I complain about cash flow and you talk about the time line of money, strategy, and policy," I whined.

He agreed and added, "Do not forget that you are deluded!"

"OK, how am I deluding myself?"

"You think your company should be growing," he proclaimed.

"Haven't you heard? Grow or die. That is the way of modern business," I insisted.

"You are listening to those who advise businesses that depend on outside investors. For your small, privately held firm, your priority should not be growth at all," he admonished.

"I give. What is my proper priority?" I asked.

As if he had said it over and over, he chanted, "Cash flow and equity!"

"You know, you are getting repetitive," I complained.

"Well, you keep asking the same question!" he retorted.

"Now I'll bet that you think my company should shrink instead of grow," I said snidely.

He raised his eyebrows and said, "You figured it out!"

I was caught by surprise. But the more I thought about it, the more I realized that anybody listening in on this conversation would have spotted my biggest problem a long time ago. I had too much capacity! The burden of being prepared was dragging the company down. "You know I have held layoffs already. We are down to the bare minimum staff," I noted.

Cutting Staff but Maintaining Core Skill

"I will make a wager with you. You can cut your current staff in half and still be able to keep up with demand," he offered.

"No way!" I protested.

"Way! The trick is to keep the most productive and motivated people. You are basically reverting to a start-up organization. You must maintain the core skill level. The people who help you work out of this hole must be well-informed and dedicated to the mission you set for them."

"That is a tall order. Besides, I hate doing layoffs. It is like kicking family out of the house," I worried.

"I would agree that you are not very good at the layoff process. You want to do it by seniority and technical skill. There is an alternative, but it takes a lot of work, and probably some outside assistance."

I thought about the recent layoff we did, and he was absolutely right. The people with the lowest seniority and minimal skill level were the first to go. "Why don't you like my approach to layoffs?" I asked.

"You need to lose the dead wood. Sometimes the new kids are the most motivated and productive people you employ. They are eager to please and are not burdened by the stupidity of the traditional way things get done. If you evaluate people strictly by their contribution to the productivity of the company, you will have better results," he predicted.

"Why do you think I will need outside assistance in this?" I asked.

"If you go just by your impression of employees' performances, you will probably end up keeping the brown-nosed suck-ups. And because you do not have the skill to interview your staff objectively to find out what they know. If you were to ask them, they would tell you who the core group is—who should stay and who should go. But nobody wants to be a snitch. They certainly do not want to tell you to your face that you are wrong. So bring in a professional to interview the staff and inform you of the results," he advised.

The little guru had coached me into understanding that my business strategy should be based on my ability and opportunity. Inevitably, both of those will change, and I must monitor and adjust my strategy accordingly.

"How do I know when I have shrunk my company enough?" I asked. "How do I know if my new strategy is working?"

"Ah, just what I was hoping you'd ask," my teacher cooed. "The danger is that you will adapt your strategy in response to fantasy or delusion. You must build reliable systems of feedback into your organization. Be a master of metrology!" he commanded.

I tried to be funny. "You want I should study weather?"

The saga continues ....

Gerald Davis

Gerald Davis

Contributing Writer
Gerald Davis Design and Consulting

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The FABRICATOR is North America's leading magazine for the metal forming and fabricating industry. The magazine delivers the news, technical articles, and case histories that enable fabricators to do their jobs more efficiently. The FABRICATOR has served the industry since 1971.

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