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Cash is king in troubled times
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It has long been a truism that the art of management is knowing the right questions to ask. The key question in today’s business environment is “do you know your company’s cash position every day, even every hour?”
In his new book Leadership in the Era of Economic Uncertainty the highly regarded consultant Ram Charan states, “Your focus must shift from the income statement to the balance sheet. Protecting cash flow is the most important challenge almost all companies face today whether they realize it or not.”
In the early days when Control Data was experiencing explosive growth founder Bill Norris startled his executives in the midst of a planning session by slamming his fist on the table and declaring, “you guys are forgetting the most important rule of business, conserve the (bleep)ing cash!”
Charan explains, “Every sale must be weighed against not just how attractive the margin is but how much cash will be tied up in inventories and receivables and for how long. Projects that once were evaluated on the basis of their return on investment now must be judged in terms of how much cash they consume and how soon they can bring in the cash.”
Charan insists that given today’s information technology company’s should know their cash position every day. Since lack of liquidity is an ever-present lethal threat, Charan advocates lowering cash break- even point as rapidly as possible for the worst-case scenario. Citing the auto industry and credit rating problems at General Electric, Charan pointed out that a lack of liquidity can bring the mighty to their knees in less than two weeks.
Breakeven points calculated on a cash basis identify actions to be taken such as discontinuing a product line, closing a plant, or eliminating a distribution channel. Charan says that after careers in the pursuit of growth, business leaders will have to adjust their mentality.
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