Strategic plan: reactive or proactive? Cash flow and beaver dams
February 26, 2004
Editor's Note: This is the second episode of a mountaintop dialog between Gerald and a wise business guru. Gerald has just been told that he has not been adept at the three critical management responsibilities – cash flow, policy, and enforcement.
I glared at my adviser. He glared back without flinching. His accusation had my dander up. In his best Yodaease, he said, "Chilled be, little grasshopper. Not everything wrong did you. A nice little company, you have."
Looking back to eight years ago, I see my job shop business doing well, but these past couple of years have been tough. Customer demand has been diminishing, and cash is really tight.
I felt the need to justify my management decisions. "The economy changed! At the end of 2000 we suddenly went from boom to bust. No warning, no reason. The Internet bubble collapsed. Major local clients moved their manufacturing operations overseas. Benefit costs skyrocketed. The government says the economy is just fine, but costs of doing business keep rising, and the value of my company keeps falling." His look of amusement stopped my diatribe.
"Strategic plan of yours relied on perpetual booming?" he asked.
"Well, no. We made adjustments to our business operations," I replied.
"Your strategy is to react to the prevailing economy?" I nodded dumbly, wondering at his apparent mirth. "Strategy must be grounded in business fundamentals, not personal comfort," he admonished. "I suspect that your 'strategy' actually is a collection of elaborate tactics. You fantasize about a perfect day on the job, with nobody yelling at you, and call that a plan. Am I right?"
I seethed. I fumed. I really was having a tough time accepting criticism, even though I had asked him for it. It was not pleasant to hear that it was my management, not the external economy, that was responsible for the financial condition of the company. "OK, I am making bad decisions, even though I think I am working hard to do the right thing. Where do I start in sorting out my errors?" I sniffled.
He pulled out a stone tablet. "What is the highest priority of your business?" he demanded.
"Customer satisfaction!" I instantly replied.
"Wrong!" he said, and bonked me on the head with the tablet. "Try again."
I cowered and searched my mind for the answer. "Growth?" Bonk. "Profit?" Bonk. "Hey, all I'm getting out of this is a knobby noggin," I protested. "Just tell me what you want me to say," I pleaded as I considered the phrenology of my lumpy skull.
"Cash flow!" he proclaimed. He then started dancing around and humming " if you ain't got that thing, then you ain't got that swing, dowah, dowah, dowah "
He handed me the tablet. Sure enough, it said that the highest priority of my business is adequate cash flow. "But what about all that other stuff that the experts present as critical to business—growth, profit, customer service, agility, leanness?" I asked.
"Those are consequences of expert cash management. They are not causes of success," he replied.
"Hang on there, little guru. I am way confused. You told me that I was a victim of borrowing operating capital using the inflated value of my assets as collateral."
"Almost correct. You badly managed the proceeds of that loan," he interrupted.
I went on. "Now you tell me that the only reason my company exists is to generate cash flow."
"You got that right!" he replied. "I know that the only reason my company exists is because of my customers and that the most important function is to satisfy their requirements," I fumed.
"That is nonsense. I am trying to help you develop your strategic thinking muscle. Strategically, you must see your business as an economic entity, not simply as a manufacturing company. You have policies and procedures for every process in your manufacturing plant, but your policies and procedures for cash flow are informal at best and reactionary at worst. Your customers trust you and mightily rely on you. The greatest service you provide your customers is to manage your business expertly. Business failure because you cannot manage your cash flow does them no good at all."
"Well, I managed the company expertly! I launched the business expansion because we were successful and facing growing customer demand," I insisted.
"You blew it when you borrowed too much money," he accused.
"If I had not borrowed the money, we would have gone out of business," I protested.
"Why is that?" he asked.
"I already explained that. Our customers were demanding that we increase our capacity. We had to have new technology to stay competitive. We also had to settle up on our line of credit with the bank," I explained.
He wiggled his ears to interrupt me. "I am sure you prepared a very elaborate business plan to support your loan application. Your problem with the line of credit should have served as a warning to you about trying to grow and expand. It indicated that you had a cash flow problem years ago. The last thing you needed was expansion!" he yelled.
I was mystified. "We got into trouble borrowing money from the line of credit because we did not have quite enough cash to cover payroll. All we needed to do was increase sales. With that extra income, we figured that we would have more than enough to cover the bills," I explained.
"Sorry plan, that was," he retorted. "Your organization was already mismanaging cash. You added inventory, increased labor expense, and increased your debt. Basically, you liquidated equity shown on your balance sheet and used it as supplemental income to support your silly spending.
"Look at your income statement. It shows you everything I am talking about," he raged.
"What should I have done?" I wondered.
"You should have listened to your banker when he asked you if the loan was really prudent. You could have exercised greater self-control and taken advantage of the customer demand," he suggested. I shook my head in disagreement.
"Since you went ahead with the loan, your best hope would have been to use the capital to improve your cash flow. Instead, you expanded the capacity of the company to tie up cash," he said accusingly.
I was apoplectic. Before I could find words to express my frustration, he said, "Meditate for a moment. Contemplate the Time Line of Money. Visualize where cash is hiding in your shop. Think of cash flow as the life blood of your business," he pleaded.
"I do not understand," I said. "What is a time line of money?"
He directed my gaze to a mountain valley where beavers were building a series of dams in a me-andering creek. "A beaver is blessed with territory. The beaver can do anything it likes with the water flow in its realm. If it does nothing, the water will pass without purpose. If it dams the creek completely, it will drown in stagnation. If the beaver manages the situation well, it will have a wonderful life.
Now consider cash as it flows under your management. Does it stagnate? Does it rush past without purpose? Do you put it to work to make your organization stronger and more stable?"
The saga continues in next month's issue.