Nobody Saves Their Way to Success

Posted on February 1, 2009

Businesses grow and win because they invest in areas that make them more unique, and more special. They do not succeed because they invest their cash so that they can save overhead.  So how should we be investing in our businesses so they emerge better and stronger? There are three basic parts to the process.

I love to sail, and I got a great excuse last week to go sailing on a weekday. One of my clients runs a technology business and wanted to treat his executive team of ten to an outing. So I chartered and captained a 40 foot yacht to sail around San Francisco Bay. This company is still growing aggressively, and has a long list of projects and services in the works that keep the top line and bottom line growing, and keep their customers excited.

Towards the end of the four hour sail, we passed by Treasure Island and a beautiful, Coast Guard maintained lighthouse and home that can only be seen from the water. That sparked a conversation between the CEO and his VP of Operations about the new building they would need to expand into shortly. I eavesdropped from behind the helm.

VP: The rent for that place is crazy! Why don’t we just buy it from Joe? I hear he’s thinking about selling it.

CEO: Well, if we had a little more cash, we could pay the 3 million for the building, but would we want to?

VP: Yes! I ran the numbers, and in just three years, we’d save enough rent if we owned it that we’d go cash positive. We know we’ll be in there for more than three years.

CEO: It would be a great way to save money, but we won’t take our company to the next level and increase our enterprise value by saving money. We do that by growing our sales faster and faster, and our market position. With the capital markets being tight, we can’t get as much money as we used to. So we have to make choices. And with the cash we have, I’d rather invest it into areas that make our products and services even more special, that our customers will go wild over and pay us handsomely for. Owning a building won’t make us more special to our customers. They don’t care if we lease or own.

Now don’t get me wrong. I’m totally against wasting money. And every business, in these times especially, must save money and cut costs. Profitability every month is critical, as is a positive cash flow. If you don’t survive right now, you won’t ever have a chance to participate in the economic recovery which is ahead. If necessary, chop costs like mad until you are not only profitable, but you have some free cash flow to invest in the future of the business.

I’m not going to spend a lot of time talking about survival techniques: There is enough of that being discussed already. I’m going to talk about how we should be investing in our businesses so we emerge as better, stronger businesses. There are three basic parts to the process.

1. Have a clear path to increases sales and profits. My client whose conversation I’ve related has TONS of opportunities to create products and services that he knows the market will love. He just has to build them and sell them. He and his team are crystal clear about the work to be done, and are measuring the results. Are you crystal clear for your business? If you’re not, you should be concerned. You can’t build a business if you’re not sure what direction to go in to produce growth. Even worse, if you’ve concluded that there are no good opportunities, if there is lots of competition fighting for the available business, and you have no solid strategy for winning more business at a solid profit, then why are you staying in business? Maybe it’s time to sell, and if you can’t sell, then wind the business down as best you can and move on. I’m serious here. Why fight the battle if you’ve got no upside?
2. Hack back costs in non-critical areas so that you are as profitable as you can be, and are generating as much cash as possible. But don’t spend cash to reduce expenses.
3. Focus your investment of that free cash flow toward the project or process or products that make you special and unique, that make you the clear choice for your customers to do business with.

For those businesses that have been hit hard, it’s hard to think about investing in the business. Our survival instinct tells us to hoard cash. And you should have more cash tucked away than ever, and try to reduce debt to lower levels than in good times. But if you become so afraid that you starve the engines that drive your business forward, your business will contract (even more than it might have already), you’ll have to cut costs more, which will make your business contract still more. Pretty soon, there will be no profits and free cash flow possible, and the business is doomed.

Those businesses that have a plan to grow and are investing in that plan are the firms that are still growing (or shrinking far less than average) and have new revenues that are offsetting lost revenues in other areas. As always, if you don’t invest in your business, it’s dying.