Saving it for a Rainy Day
If you are reading this, the Mayan calendar was off at least by a few days and the end of world did not come as it was predicted. And, hopefully you’re enjoying the Christmas & Holiday season and reflecting on the year as it comes to a close.
Speaking of reflection… we were having an interesting conversation last week about some businesses who despite the overall disposition of the economy experienced not only growth but a very a profitable year in 2012. The conversation reminded me of the first few years that I owned my equipment dealership; the fiber optic boom was moving at lightning speed (pun intendedJ) and our equipment was very instrumental in getting it put in the ground. Our customers were enjoying very profitable years and the dealerships that provided equipment to install it benefited as well.
It was very easy to get pulled into a cycle of reckless spending, because you start convincing yourself it is the “new normal” and the additional revenue will just keep coming. But the reality is almost everything has a cycle, some are not as severe as others, but the growth arrow seldom points upward 100% of the time.
The closest thing I had to a “business coach” when I owned my own business was the dealership where I cut my teeth in business. And that dealer had not only been a good leader as my former employer, but continued to be a trusted advisor, mentor, and friend as my dealership was growing. A couple things he often stressed about growth were the importance of having controlled growth and the importance of reinvesting profits back into your business. (By the way – this particular idea was one of the big findings from Jim Collins latest book – Great By Choice…we wrote about that a few months ago in 5 Ways Your Business Can Fall Off the Cliff).
The controlled growth mindset keeps you from doing things like over staffing the first time you get a backlog or opening a new branch in a high growth area without researching it thoroughly before implementing. It is mostly about asking more questions before you make a decision that is going to have a significant financial impact on the business.
But reinvesting profits back into the business was without question the best advice he ever gave me. His experience was, the best stock he ever put money into was his own business. So as my business grew that was the approach I took. It may sound simplistic, but it takes a lot of willpower, especially when things are going great and you see others splurging. Successful business owners are often tempted to take profits out of the company and start “diversifying their interests”. Those “interests” will range from other businesses, to lake houses, boats, and real estate. And trust me you can find all kinds of reason to justify every one of them.
But I poured the profits back into the business, we paid down debt where we could and built up a reserve of cash so if the economy turned south we wouldn’t be overly exposed. As it turned out, it was a great move – things changed quick when the dot.com bubble burst and 9/11 happened. The tide turned, sales plummeted and it became survival of the fittest. Many equipment dealers had over built, they had bloated inventories (guilty!), and stretched credit lines. Thankfully, we had been practicing controlled growth and reinvesting profits as a consistent part of our business plan. And because of those two strategies we were better positioned to navigate the downturn and maintain a healthy business. It wasn’t easy, but relative to many others we were in good shape! I will say that until that downturn happened, that rainy day, it was really hard to keep from “diversifying my interests”. Thanks, John!
How about you, do you have a plan to save for a rainy day in your business? As always we enjoy your comments & Merry Christmas and Happy Holidays to all.