Ever had to “idle” your company before or ever been part of a company that had to put itself on “pause”? You know, where you’ve come to the end of your cash (or close to it) and about the only way to keep going is to just not go anywhere. By that I mean, the owner or executive tells most everyone to stay home, shuts off most of the lights and turns the heat down. They are thinking “cost cutting” but only for a short while until they raise that more money of fix the situation that caused them to run out.
That is what I had to do earlier this month: help a friend – let’s call him Frank – think through this scenario. He had made some poor decisions, the worst of which was to accept some really large orders (great for sales!) and extend lots of credit to secure them (they pay well). Sure, his P&L looked great and so did his balance sheet at the top level. But, as the weeks and months passed, apparently the cash on his balance sheet was dropping as he spent money but his accounts receivable was remaining high because his customers still had not paid. Some of the customers were not paying because their credit was poor (Frank did not check them out well) while others simply did not have to pay yet because their invoices were not due.
So, Frank had kind of ignored this situation (he is a pure salesman, one of the best, and focuses on getting the next order) until his bookkeeper told him there would not be enough money to cover next week’s payroll. That got Frank’s attention and he had 10 days to find a solution. That’s when he called me.
When he explained the situation, his plan was to downsize to a skeleton crew and bring people back when he had the cash, maybe a week or two he thought. Sounds logical. It’s not a pretty situation by any means but if you don’t have the cash, you need to take action to reduce expenses fast, right?
That is what I might have done long ago and yes, I have gotten myself in similar situations in my twenty years as an entrepreneur. But, here is what I have learned: companies are living, breathing entities. Idling a company is like not amputating an arm: it can still function but not well. Idling it a longer is like amputating the other arm: now it is darn hard to complete day-to-day tasks…and soon, the company begins a slow spiral downward oftentimes without the chance of recovery.
Businesses need to be constantly moving forward. If not, then in reality, they are moving backward relative to everyone else especially their competitors. Once you have customers your business becomes dynamic and stopping that forward momentum is just going to begin that slow, lingering death. Sure, someone might be answering the phone with the lights on and it may seem like you are open for business but it’s all for show…and soon you will be found out. When you are discovered, it’s the beginning of the end.
My advice to Frank had he asked me long before he called would have been to never get himself in this position. Create a business “instrument panel” that captures the key metrics of your specific business (and includes several cash metrics) and keep your eye on it everyday so you never, ever, ever run out of cash. But, that is not what we had on hand that day; it had already happened and we were in a position of practically no cash. I did not need to teach Frank this lesson learned from my own experiences; he was paying for this self-education in real time.
But, since idling was not an option, we had to find other solutions. What did we do? Well, to make a long, painful and lots of all-nighters story brief, we did two things:
- factored much of the accounts receivable (some the factor would not accept)
- sold some large orders to major customers who would give us an up-front deposit in order to get a discount.
Fortunately, these options were available to Frank and they not always are. But, they were not fun. Factor financing is a super expensive way to fund a business and not for the weak of heart. Sure, we got orders from those big customers but Frank took a huge hit in profitability. Worse, these same customers will probably want the same discount next time; customers have long memories when it comes to enjoying discounted pricing.
Frank will make payroll this Friday but he learned a hard lesson, one that many entrepreneurs have learned themselves. Too bad for him he did not learn it from someone else ahead of time – that is always the best way to get an education on a difficult issue.