In December I discussed your goals, and priorities. I added a chapter on cash flow so people who are too focused on short term gains and on hits instead of medium and long terms gains can see where they are making mistakes. Let’s talk about the three scenarios and what you can do with these scenarios as we move on to the next step in your formula.
Ideal Scenario – The complete picture.
Some companies are really stable and continue to grow at 25% or more for the next several years. Others are fairly modest and vulnerable to market correction. In this situation you can do plenty of very good things – such as:
o Evaluate your expenses
o Preserve your profits
o Manage your cash flow
o Substantial salary increases become short dated savings
o Continue to excellence!
But before you do anything else, you need a banker on your side. You have to properly plan for a bad year because if things go dreadfully wrong you’ll need your banker to bail you out. The bank has a responsibility to monitor the firm and prepare a thorough review and within 5-7 business days you can assess where you stand.
Summary – Definitely Top
Business Model: Scenario 1 – That’s Where You’re At
You’re in business – you’ve been manufacturing graphically complex Circuitry of plastic. You generated 6mw of work and 5000 direct networks and 500 employees. Your key operating expenses are:
•Power
•Insurance
•Rent
•Taxes
•Supplies
•Stocking and shipping
And you survive of sales and payables can be satisfied somewhat from cash flow and equity. In such a scenario, you continue to operate smoothly and prudently with the balance sheet recording sales of 1payers and annual reserves of $20m. At the first of the year you spend $1m to build 4mw of new products and bring the production lines back up. Your finance team believes you can make it through the first year without any major problems and make and keep customer class members from leaving. The new investments seem to make you money. The variable expenses are within your capability and stockholders have no concerns.
Business Model: Scenario 2 – The Dollar Naysayers
In this scenario you print huge amounts of money to expand your market share and get new products. Unfortunately, cash flow seems to be a real problem as you resort to selling ‘not necessary’ items to stay afloat. Major customers are failing to pay you and cash flow seems to be a real concern. Cash flow is the real question and if you don’t have it, you don’t survive for long.
Financial Model: Scenario 3 – The Market Fluctuations in a Changing Economy
We have all seen attempts to market products electronically but there is something more sinister that occurs in that scenario. As the economy changes, so does demand for 5000 products now being developed. So you have to change with the times – do you provide the products that people want or you have to take the chances of changing your product line.
Financial Model: Scenario 4 – A Good Business Year
Here, we are talking about consistency, profitability, and inventory. Investments are steady and investments and inventories are as large as you need them to survive. Because of guidance from your banker in form of a bank line and you ability to negotiate a flexible operating budget based on the needs of your operating department you are using all of your cash to grow your business.
Financial Model: Scenario 5 – The “Undisputed aggressively”
There is a lot of volatility in an economy and shareholders will want to stay as close to the ideal of the “business as usual” as possible. Whether that means lowering inventories and holding off on retirees or making more efficient use of the funds you have to retire, it is important to do what is required to preserve or build solid, profitable businesses. The worst thing you can do is panic.
