REVISE:  Save For Growth

Thus far we have discussed the importance of understanding your industry cycle and choosing whether to wait and rise with the tide, or seize the opportunity to grow, gain market-share and enhance your capabilities (M1).  Next, we demonstrated the many advantages of planning for and executing your growth strategies during the downcycle (M2).  And we explained the importance of understanding your own and your company’s risk profile and how those profiles impact business decisions (M3)  

In this article, we introduce the concept of “Saving” vs. “Cost Cutting”.

It is natural to experience fear at some point during an economic cycle (particularly during the “Down” part of the cycle).   Fear paralyzes our ability to make the right decisions at the right time.  It is the reason many business owners take the position they can “survive” by making little-to-no changes during an economic contraction.  The result: they simply eek out their existence and limp along.   However, other owners capture this opportunity and take action to preserve cash and invest in their future to get ahead of their competition.

Specifically, in an economic decline, businesses tend to think in terms of CUTTING BACK costs.  We prefer to reframe this as “SAVING” for growth.  Our approach is to not only make the necessary cuts to achieve profitability, but to cut further to create a war chest of cash that can be deployed to grab growth and better position your organization to outpace your competition during the recovery.

To illustrate, consider a business in the growth phase. It invests capital to support growth to reach the next level of revenue.  In our example, the business looks to surpass $25M in revenue (Point A) and continues to grow to $50M. It ramps up infrastructure (investments) to support the revenue growth to $50M.

When the downturn arrives the business must contract to survive.  The business looks to slash costs at a pace equal to the reduction in revenue and it shrinks back to $25M (Point B – breakeven).  This is a “Cost Cutting” mentality.

What business owners should be thinking is how much more they need to cut to generate sufficient cash Savings to invest in their future.  Read M2 here for more.

In our example, the business needs to drop its cost base to $20M-$24M and use the $1M-$5M of Savings to invest for growth in the next Recovery.

The key message in M4 is ensuring you have sufficient cash to invest in your future.  This means shifting your perspective from “Cutting Costs” to “Saving” – making deep cuts to allow for future investment.

Economic Curve demonstrating that the infrastructure that supports the business prior to a recession needs to change to support your next growth cycle

Keep in mind that the cost structure that got you to your last peak may look different in the future (think automation, efficiency, processes improvements, etc.).

Those businesses that make strategic investments in a down cycle will leap-frog their competition and gain market-share during the next boom.

If you want to understand how to carve out costs to invest in strategic assets or how to use functionality to create cash to start growing again

Enjoy our next brief Mistake #5:  – Business Model and understanding your financial ratios.

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