With the possible exception of American Banknote Company, businesses are not able to print money. Because of this simple fact managers must effectively control resources, especially cash, so that they are able to weather business downturns.
It turns out that in the early 2000’s some banks were loaning 30X their capital reserve. The folly of this tremendous leverage soon became apparent, with an economic downturn precipitated by the “housing crisis.” When mortgages “went south” many financial institutions could not cover their outstanding obligations. So they curtailed lending in order to conserve cash and began a difficult, self-defeating spiral of credit shortage – reduced consumer and business spending – reduced income – further reductions, etc. And, although the downturn began with the housing sector, it quickly spread to other segments of the economy. Then, we found that many other companies (automobiles, retailers, etc.) also had substantial debt, and had based their sales projections on ever-expanding consumer purchasing assumptions. Even massive, federal intervention could not stem the downward spiral. As a result of these circumstances everyone learned the perils of debt and over-spending. Plus they found that underfunded companies were vulnerable and unable to exploit business opportunities when credit dried up.
A Common Theme
The common theme here is that companies used debt as an expansion or operations tool while failing to build cash reserves to tide them over uncertain times. On thing is certain: change will happen. Cycles will occur, unanticipated events will take place, consumer sentiment will not remain static, and purchasing patterns will alter. This is particularly true in an economy such as ours, where 80% is consumer-driven. With mass media influence, consumer sentiment and purchasing plans can be influenced with rapidity and profound consequences.
In prior eras, and a diverse manufacturing/exporting economy, many factors would have to conspire to create an economic “perfect storm.” Purchasers in diverse sectors and countries would have to curtail expenditures simultaneously. No longer. With a national consumer-based economy and overwhelming mass media influence, consumer sentiment and purchasing plans can be influenced with rapidity and profound consequences.
Money is the ‘Lifeblood’ of Business
Business owners, Boards of Directors, and company executives would be wise to adopt a philosophy and practice of sound financial management, perhaps even frugality. Executive compensation is one of the areas to examine. Almost every day we learn of some corporate executive or investment banker with a salary and bonus structure amounting to $100 million or more. This is absurd. While executives should be compensated in accordance with their contribution to the company, outlandish packages are counterproductive. How much in sales will be required to generate the amounts necessary to pay these overcompensated characters?
Yes, there are transformational leaders who can make a “sea change” of difference in corporate earnings. But these individuals are few, and far between. Bloated salaries more often go to marginal contributors who have cozy relationships with the Board’s compensation committee. Structured compensation plans targeted to incentivize particular performance results, along with realistic total compensation “caps” would be better. Then, costs would be contained, while attainment of strategic financial goals is rewarded.
Cozy relationships with suppliers, consultants, and others can also hurt the bottom-line. We have all suspected or known of such deal-making. Certain vendors seem to have an “in” with management. And while the “low bidder” may not offer the best overall deal, it is certainly responsible to promote a competitive atmosphere.
The biggest savings usually accrue from the minutia. The little costs, as they say add up. In government, the joke is: “a few billion here, a few billion there, and pretty soon we’re talking real money!” Saving a nickel on an item that you use thousands of will help the bottom line.
–Re-examine all cost items. Scrutinize them rigorously and identify potential cost reductions.
–Reward employees with incentive for identifying savings. Rewards should be based on a percentage of the cost-savings realized over a reasonable period of time, say first quarter actual savings or projected amount based on a trial period.
–Perform a compensation review, especially executive compensation, to make sure your salaries are in line with comparable companies, particularly the competition.
–Examine your pricing structure and ascertain if it is competitive, or too high or low.
–Negotiate with your suppliers, the landlords, everyone that you pay money to, and see if you can get a better deal. Negotiate, negotiate, negotiate.
–Don’t use a “meat axe” approach to cutting costs; use a scalpel instead! Across-the-board cuts only work over a short, emergency, period. Besides, it penalizes the most effective and conservative units in the organization.
–Develop a “cost consciousness” among your employees. This starts with the executive ranks, but is required of everyone in the organization. Wasteful mentalities cannot be tolerated in today’s economic climate.