January 16, 2024
When the ground is shifting beneath our feet, and market volatility has been a near constant over the past few decades, it’s hard to create a sense of stability. While economists, investors, and reporters hotly debate their predictions and theories, it’s widely agreed that the days of near zero interest rates are behind us. Even relatively speaking, the past few years have been a whirlwind of natural disasters, the pandemic, geopolitical strife, and conflict. Each crisis has drastically disrupted supply chains and demanded manufacturers implement an immediate band-aid solution just to get by. But the short-term solutions are rarely followed up with a more robust process. This has created incredibly fragile companies and supply chains despite generally strong markets.
So how did this come to be? It’s not as if there haven’t been volatile time periods throughout history. Let’s start with the overlapping timelines of Manufacturing/ Enterprise Resource Planning systems, the “make vs buy era” of outsourcing, the popular rise of lean and ideals of just-in-time manufacturing, and incentives to maximize shareholder value. This left American manufacturers smaller and leaner, lacking redundancy and vulnerable to risk. Even before the pandemic popularized “supply chain” into house-hold vocabulary, loosely translating to consumers as stockouts and backorders. Each natural disaster was wreaking havoc on the transportation and availability of goods. I recall an angry executive in 2017 insisting I get his parts shipped out of Houston despite the fact they were completely surrounded by flooding. As if the liquidated damages of his late shipment would be priority over humanitarian relief. In my experience Just-In-Time was more often, “Just-Barely-Not-In-Time.” And anyone who bragged of being more successful than that had some third-party logistics company holding inventory nearby, just so it wasn’t on the books yet. The concept is simple enough, inventory is cash. Therefore, better turns, lower work in progress (WIP), and lower waste equals better free cash flow, more possibilities, and more winning! Like studying physics without friction, business without risk is simple enough, but that’s not how the world works.
Then came the pandemic, unlike the other natural disasters, it impacted the whole world simultaneously and broke nearly every supply chain that existed. But anyone who’s studied lean will tell you, inventory hides problems. Therefore, all of those supply chain challenges could be made negligible with more inventory. Unreliable suppliers, quality issues, unreliable workforce, demand swings, unreliable shippers, all minimized by putting more inventory, more WIP, more finished goods everywhere. And with free money, or near zero interest, it would have been foolish to miss rising demand due to a lack of inventory.
It was hard to say which parts were “the new normal” or “transitory.” But by now we understand stability is a myth so how long does a new normal last anyway? Some may say normal is so temporary an article about how we got here is irrelevant. But I think it’s a lot easier to get where you’re going if you know where you’ve come from.
As we look ahead at relatively high interest and countless global risks, what is a business to do?
First, manage the cash, and then value investment in risk mitigation. The short term answer is always managing the cash. Which is not an obvious approach for many business leaders. As companies grow and KPI’s stand in for actual results, accounting is accrued or revenue is project based, it’s fairly easy to lose track of the cash. But if you can mind the cash, you can probably weather the storm. Beyond that, risk mitigation needs to be explained to shareholders in a way that preserves or increases company value.
Tips for Measuring Risk:
Key Indicators of risk include “obvious” events, like the loss of customers, drastic changes in cost, shifting demands, production issues, disrupted sales channels, etc. These events are usually noticeable to everyone but aren’t always measured and tracked in a way that shows their true impact. They are often dismissed with the assumption that they will correct themselves.
Some metrics and ratios to track over time and watch for any significant changes are: inventory turns, how many times you go through the value of your inventory per year, aging receivables, aging payables, margins by product, current ratio and/or quick ratio to measure liquidity.
Late or unavailable financial reports and inaccurate accounting systems that make it difficult to track the metrics mentioned above are another reason for concern. Getting help correcting these issues as early as possible gives you more options when identifying solutions.
How to improve cash flow: The first levers to reach for are accounts receivable and accounts payable. Evaluate your cash conversion cycle and identify ways to shorten it. If this is an area you need help with, the earlier you ask for help the more options that will be available to you.
Warning: Do not underpay payroll taxes. Government liens supersede other secured liens, may trigger covenant defaults, and are a matter of public record. Additionally, you may be personally liable for certain taxes beyond the protections of business structures or bankruptcy.
When do you need help: If you think you might need help, then you probably do. The earlier you get help the more options available. Other signs include if you’re stretching vendors, are concerned how you will make payroll, or have even briefly considered underfunding payroll taxes.
The stress of a struggling business is absolutely exhausting, making it even more difficult to solve the problems at hand. Please reach out to me for a confidential, judgment free, conversation and I’ll make sure you are connected with the right resources for your unique circumstances.