How Does Debt Catch On Fire?

What's Your Excuse?

Most leaders of any business today do not need to worry too much about producing high volume.  The recession put a huge limit on increasing sales growth.  Although some companies were able to fair much better than others during this recession, most would agree that a large level of volume was lost.

Losing high levels of sales volume will force a business to learn more about how to operate lean.  This is one of the best benefits a tough economy produces.  It forces the business leaders to re-evaluate how they spend what they spend.  They are forced to become more efficient in their operating ways.  During a deep recession if they fail at efficiency, they may fail in the business.  This likelihood is very high even when their business model controls the lions share of the market.  When cost heavily outrun lowering incomes, junkie stuff happens.  When debt catches on fire no dominance in market shares can douse the flames.  Big companies burn hard, too.

How does debt catch on fire?  When someone you owe calls it in.  Nearly every business model in this world operates with a certain amount of ongoing debt.  The trick to managing debt is to keep it under what your business can afford.  Make sure your level of communication is healthy with those you owe.  You need to secure their fears.  Once their confidence crumbles, a spark begins.  When the tax man, the suppliers, the banks and the other lenders loose confidence in your ability to pay them back with some tolerable terms the fire begins to burn more heavily.  If that fire leaps above the rooftop of your business model, other lenders see it and begin their dash to save their own shares.  Before you know it, everyone is calling in their debts and your business flames up large enough to burn itself out of existence.

First of all, learn how to reduce and manage the debt you produce.  Secondly, make sure your debts do not exceed your ability to control their burn.  Thirdly, keep the small fires out of the sight of your other lenders.  Control the smoke.  Reduce the potential panic.  Lastly, work towards a more lean set of functions that drive your business model away from operating on the dependence of debt.

We are human.  Even the most disciplined business leaders have a certain streak of humanity resting inside their brains.  Our business leadership must remain disciplined to ignore the urge to operate casually.  When volume is running high, our time chips are smothered with the race to keep up.  A lot of attention to details gets left out.  Left out details can lead to unwanted consequences.  For example, inventory orders may not be double checked when placed which increases the chance for duplication, errors and incorrect items arriving.  This adds unwanted and unnecessary costs to the business bottom line.  Chasing fast growth consumes valuable time chips.  Little details get eliminated and left out.  Errors occur at a higher rate of speed.  These errors add unwanted and additional costs to the bottom line. The business finds itself performing under par.  This phenomenon is described by the phrase that volume can hide a multiple of sins.

However, because so much volume is occurring most business leaders do not force the efficiency factors.  They skip wasting time on the finer details.  They do not demand slower but more accurate work performances from their employees.  They get caught up in the laziness of performing the little stuff well.  Details of critical importance to the bottom line get easily omitted.

Remember, volume hides a multiple of sins.  Keeping up with the increase in sales usually becomes the main focus of the leadership levels of business attention.  This produces a quiet but real drain on the flowing of capital funds.  That drain is not usually recognized or realized until that volume slows down.  This is one of the most difficult things to do in a fast growing business model.  The art of properly managing huge increases in volume sales is a serious management responsibility.  I know we are slowly recovering from a tragically huge recession, but some business models are experiencing some interesting growth patterns right now.  This is a dangerous place to be.

In business, volume hides a multiple of sins.  Let's take some pictures of that view.  Every business leader who plans to successfully recover from this past recession must now begin the proper work to address this potential and growing issue.  As business leaders who have survived this recession, this current economic mess...did so by doing what was necessary to do.  Like it or not, every survivor did the right trimming at the right time in the right amounts on the right things.  As ugly as it has become, survival was the goal.

Let's see what we must be preparing to do next.  How do we prevent our debt from catching on fire?

Page two.

Some Climb The Obstacles Well, Even When They Have Serious Limitations.

I have been hired to help prevent three separate business models recover from near failure.  Each of them had very prideful leaders.  Those leaders made sure nobody outside of their very tight and private circles of influence knew how badly their economic situation had become.  Their positions next to bankruptcy was kept a secret.

The more I began the work to help them recover, the more I discovered a deeper hole.  It is my observation that when a business leader becomes wrapped up with trying to protect how badly they are financially positioned, they often times tend to avoid accepting this bad spot to themselves.  Denial is real.  In each case those leaders were not clearly aware of how deep their business models had become.  They were ignoring the flames that were producing the smoke they were managing.  This is common place stuff.

Therefore, the first step to preventing a debt fire from burning more out of control is to open up, to become more transparent about the recovery plan.  In each case, develop a plan for recovery.  Get serious about that plan.  Determine the correct level of debt that must be removed.  Then advertise that plan!  Make that recovery plan your marketing news!  Tell your story.

In every single recovery effort that was successful in reducing debt enough to recover well, my debt plan became my worn out story.  It became the story I used to remind my suppliers what we were working on to achieve our solvency.  Guess what I discovered?  My suppliers set up plans to help me out.  Many of them forgave interest charges.  I asked, they gave.  Many of them accepted lower monthly payments to help reduce the daily demands on cash flow.  Some that required cash on the barrel purchasing made some occasional adjustments and allowed bits and pieces of small time terms.  When the story of recovery became visible and real, they came to the table to help.  It was an amazing discovery.  In all three recovery projects, this effect was real.  If I was to ever to be hired again to help recover a seriously troubled business model, my first step would be this process.

Number one on my list would be to determine how accurately deep we really are.  Once that debt problem was firmly established, I would develop a recovery plan to reduce that debt.  In that plan, I would contact every single provider of goods and services for that troubled organization and 'sell' them our story of recovery plans.  I would ask for interest forgiveness, simple terms and some lower monthly payment schedules.  I would be sincere, honest and transparent.  I would promise to keep them up on the regular progress about our efforts to recover and keep them in the loop of that work.  I would call them regularly.  In some cases, my day would be filled with phone calls and emails sent to the account representatives about our progress.  They had no reason to fear our failure.  Money came when it should have disappeared!

The next step I would encourage is to cut costs where it hurts.  Find ways to operate differently.  Every business model knows this trick so we will not discuss it deeply.  If you fail at cutting costs where it hurts, your model is destined to die.  Enough said on this one.

Next, work on special ordering stuff.  This allows you to take a down payment, say 20%, for goods you have not yet purchased.  That 20% inflow of cash can help you manage your other buying challenges.  But be very careful to pay closer attention to these funds.  They are yours on loan from your customers!  Steward them with the greatest of care.  Make sure your special orders do not get delayed because you lack the funds to acquire them in a timely fashion.  Do not build a hidden trap you will not be able to climb out of if you spend those funds errant.  Add a special order program with the notion that it will become your special project of close attention.  Treat it like an 'interest-free' loan program.  Give it the processing respect it deserves.  You need new 'free' cash.  This is a creative way to generate that 'free' cash.

Remember, your debt is on fire.  We are trying to reduce the level of the flames.  These are some things that you can do to reduce how badly your debt fire is burning.  Remember also, your attention to detail on these little steps is crucial.  One bad skip, one bad missed communication to a supplier you are leaning on to use can destroy the confidence they have in how well you will do.  Your transparency is vital.  Your ego needs to be removed.  Your honesty must take over.  Learn the art of eating crow, working smart and managing tighter.  Stay directly on top of it.

In my last recovery project, I checked the cash position of my bank account at least three times every single day!  I was so in-tuned to the flow of cash that I was timing every little minute of using capital.  I had promises to keep, people to gain trust from and deals to be served.  The cash could not sit around and become complacent in its movements.  It had to be working full time, all of the time.  Learn this art if your debt is on fire.  It will help you to find a way to recover from this awful set of recessionary times.

Do not allow your debt to catch on fire.  It may smolder a bit here and there, but keep it under control.  If you fail to keep the flames down, try some of the strategies I described above.

In the end, it ain't no fun.  Get over it.  Do the good work anyway.  Keep up a good smile and reflect your process in peace...even if it is thankless.

Until next time...