The bulls are firmly in control, but the bears are making a ruckus: will we be ready when things change?

Our economy has given us some great rewards in the last few years. North Texas has experienced phenomenal growth for several years now:

  • Many large companies have moved here.
  • For every one of them, 10 or more supporting businesses have moved here too.
  • And don’t forget the housing market plus all the infrastructure to support all the new arrivals.

It’s not just been a bull market, but a roaring bull market and it looks to still have some healthy life still ahead.

On a broader basis, stock market volatility has returned:

  • We have had several years of consistent upward movement.
  • Investors seem to have reached that point where they are expecting a correction and get a little jittery.
  • The market drops quickly on news and then rebounds as bulls continue to buy the dip.

The overall market is still positive.

However…

While there is really no reason for concern just yet, there is something lurking that we should all pay attention to carefully.

That something is interest rates.

  • The Fed is signaling more short-term interest increases on top of the ones they have already put in place.
  • They will also be selling debt sitting on their balance sheet into the market.

All of this will affect borrowing costs.  Not just for our own businesses but for our primary customers and their customers.

Let’s take an example.

North Texas is in a building boom.

Those buildings (projects) have a timeline to completion which could run a few years.

Lots of different companies provide goods and services to these projects: companies like general contractors, architects, engineering firms, electrical, plumbing and construction contractors, material suppliers, and related trades and suppliers.

These companies employ a lot of people who buy goods and services from other businesses.  Many business sectors benefit.

All projects rely on financing.

Companies in this supply chain use leverage (debt) too.  Increases in interest rates which is the cost of debt translates to less funds available for other purposes.

As interest rates rise the number of projects will likely decrease because the economics won’t work as well.  Some projects already scheduled could be delayed or scrapped. With fewer projects in the mix there will be greater competition for the remainder creating downward pressure on the price of services as well as a build-up in inventories.

Those with higher debt service and the least free cash flow will begin cutting costs, delaying payments, laying off employees or filing the big “B.”

Then the ripple effect begins.

There will fewer people to buy certain types of goods and services causing a slowdown in other business sectors.  We all know the process.

Today everyone’s boat is floating high with the tide.  It’s easy to make money.  The real test of leadership is being prepared for adversity–that “what if” you don’t really want to think about – and how you perform when it comes.  The cycles of 2000-2001, 2007-2009 and 2011 and the precursors are repeatable (I can go much further back but that’s giving away age).

We are enjoying the good times, will we be prepared when that changes? :

  • Can you reduce debt and what you think your borrowing needs are or will be?
  • Can you improve your accounts receivable collection time with your top customers by even a few days?
  • Do you have the right customers or should you amp up marketing?
  • Do you have the right people and processes in place inside your company and as partners?

We can get away with much while things are good.  It seems it is also a good time to fine tune.  What do you think? Sure would like to hear your views.

Jay

What’s the Driving Force in Your Business?

If you’re like most of us, your growth plan next year is all about some percentage of an increase in sales. Commensurate with that will be some increase in costs and expenses. Both of these are based on your current financials – what do they look like this year and over the last several years. Those give us the confidence to project into the new year.

During this time of year, I am often reminded of a lesson I learned a long time ago – about the difference between cost and expenses and investment for the purpose of a return.

What if you turned your thinking around?

I had recently sold a successful business to a partner that I had been in business with for over five years and had taken a position managing a struggling computer software-hardware distributor for a large privately held company. Our first year was nothing to brag about but we finished within our budget. The second year, however, was all mine: I set the budget, the sales projections, and other important operational details.

Since this was a foray into the new world of computers, the entire company leadership was focused.  And a big reason I was attracted to the industry and the company. As we got into the year, it became painfully clear that we were not on track to meet our sales projections.  So I began the process of paring back on expenses. Keep in mind that I had spent the previous five years in my own business, so I was watching the financials like they were my own.

In a progress and status report meeting with Ron, the company president, I was asked about the sales numbers. What were my thoughts on why we were not meeting sales projections and what my ideas were to turn them around and begin hitting them? In our discussion I made the comment that while we were not meeting the sales objectives, I was also closely monitoring and cutting our expenses so as to not get them out of alignment. His response was a wake-up call.

“Why would you do that?” he asked.

“Well, it just stands to reason that if we’re not hitting our sales numbers, we had better be cutting back on our spending.” I said, thinking, again, that this is exactly what I had been doing in my own business.

“Dave, you’ve got to change your paradigm, here.” He said. “In this business, we budget our expenses based on what it’s going to take to make the sales numbers. You have been given a budget that would drive the sales number. Why in the world would you cut back on those if you’re not meeting your sales? You’ve got it backwards. We’ve given you that money in order to achieve the sales number – that’s our return on our investment. If you’re not hitting your sales number, you need to evaluate why and how you can find the right investment to make those numbers – not cut back on the investment.”

Now, I’m going to leave that discussion right there and let it settle in. Because if you’ve been running a business for any length of time, you’ll get what Ron was driving at. We get into the habit of projecting sales and costs with the same attitude. We set the sales number and then try and figure what our costs need to be in order to hit that number – based on what we did last year. This is standard thinking. Growth thinking is another paradigm – it’s a slight twist. But that twist can bring you great rewards. Here’s the twist, if you haven’t already figured it out.

After you finish your regular projections. Reverse your thinking about your financials. Instead of thinking about what the top line is and then what your costs are going to be to achieve those. Think, instead about your costs first. The new thought: “If I spent that kind of money on a new investment, what would I want my return to be? The same as last year? Maybe a 10 or 15% increase?” How about, “What if an investor came in today and offered me a check for the amount of these expenses? What would he and I agree on would be the right ROI? What sales level and what bottom line should that check amount drive?

Additionally, throughout the year – you’ll be asking a different question. “Am I getting the return on my investment that I wanted? If not, why? Am I spending my money on the right things and people to achieve that?” This as opposed to, “I’d better cut back somewhere because I’m not hitting my sales numbers.”

I know this sounds like a minor difference, but I can’t tell you how many times I observe this. Thinking of cutting costs as opposed to evaluating ROI those costs should be driving.

Either you’re driving those costs in order to hit your ROI or the costs are driving you.

Change your paradigm and see if you don’t see a significant change in your business.

Blessings my friends.

Dave

Are You Making Plans for Next Year?

We’re talking here about your annual business planning session. The annual “how are we doing, where have we been and where are we going from here” meeting. However, if you’re looking to do the more significant strategic planning meeting, your list is going to be significantly different and will incorporate far different elements.

Here’s a brief checklist of the basic things to get done to make the most of your planning:

  1. Establish the objectives and purpose of your planning session. Include plans for all of the major business areas in your company:
    • Sales
    • Marketing
    • HR and personnel
    • Finances
    • Operations (systems and processes)
  1. Gather all the data needed to evaluate each of the above. Delegate this to the department heads when and where possible. It is important that your leadership team participate in this exercise. They (and you) will need the last 3 to 5 years of data and any comparative year to date info that has been tracked for the current year.
  2. Formulate the guidelines of the exercise to challenge your team and let them know what they are working toward.
  3. Set expectations for the new year. This will be the time to tell your team and get them all going in the direction you want. Ten percent growth year over year? Five new major clients?Five percent EBITDA growth?  You get the idea. You’re the leader.  You are the only one with a blank page. Everyone else will be working from your outline.
  4. Draft an agenda and determine how much time this planning time is going to take. One day? Two days? Delegate the planning of the program including location, food and other details.
  5. Schedule the meeting.  Put it on the calendar as soon as possible so everyone has ample time to clear everything else off their calendar. This should be a “no miss” meeting.

One final, but important, note: invite as many people as possible to participate and contribute to this, even if they are not going to be in the actual meeting. You want engagement and the best way to get it is to engage them first. If you’re a business of “one” you can still engage your closest adviser or mentor.

Good luck with your planning. If you need help in this early stage, the actual planning session or in the execution of the plan, I’m here for you. Call or text me. I’d be honored to help. Your success is my success.

Dave