Would You Rather….. Die of Starvation or Indigestion?

Have you ever played “Would You Rather”? My 10-year old son loves to play, and this is usually how it goes: Would you rather swim with a megalodon while wearing T-Bone swimming trunks or run a marathon in the lightning storm while wearing a hat with a lightning rod?

To all my entrepreneurs, I have a “Would You Rather”:

Would you rather see your company die of starvation (no growth) or die because of indigestion (too much growth)? The correct answer is NEITHER. Dead is dead, it does not matter how you get there.

If you are in either potentially company threatening situations, you know you have to ask some pretty tough questions, and more importantly, provide tougher questions.

Starvation, or a period of consistent deterioration in sales, is a stressful place to be. I am not a fan of the swimming shark business plan (keep moving forward at all costs otherwise you die), but consistent and profitable sales are critical to the sustainability of a company. It is simply one of the physics of business:

If you don’t sell at a profit – then you won’t have a business.

If you are facing starvation, here are 3 questions you need to answer and 1 statement of fact.

What has caused the change?

Duh, it does not take a rocket scientist to ask this, but it cuts to the heart of the matter. If revenues are declining, then customers that once saw value in your product or service no longer do, why? Additionally, most businesses have constant expense pressure, which deteriorates profitability. Many entrepreneurs know that there is only so much increased cost that can be passed on to the customer; but just taking it on the chin and eating the increased costs is not a sustainable course of action. Action must be taken and most likely it is a blend of price increase and cost cutting.

Is it time to shift and compete on something that has nothing to do with price?

Based upon your answer to question 1, you may have to innovate, not only by finding ways to produce your product or service faster and at lower cost, but also with increased value to your customer. This will not only allow you to charge a higher price, but it will make them stickier. One major hurdle in achieving this is customer education. You must have a clear message that you deploy to educate your customer on exactly how you bring value, even if they don’t currently see it.

Is your balance sheet structured to help you through this innovation or restructuring?

The best time to answer this question is before you begin to starve. The second-best time to answer this question is the moment you realize you are in starvation mode. Answering this question will force entrepreneurs to make some honest assessments and potentially gut-wrenching decisions. Many are not up to the task; but for those that are – their companies stand a much better chance of surviving.

Profit, not sales, is the best nutrition for a starving company.

When your company is in starvation mode, the only way to give it the nourishment it needs is to provide cash. This can come from current owners (owner injections), new owners (sale of equity) or debt (a potentially catastrophic idea, that if not executed properly can accelerate a company’s demise). However, the preferred source would be through profitability. Just as aligning your balance sheet will require some tough choices and a sound plan, ensuring that everything else is stripped so that profitability can be gained is not an easy thing.

Indigestion, or a period of rapid growth can be just as deadly as starvation. Often described as “outrunning your own headlights”, this is much more exciting and fun. After all, you started your business to win deals and succeed; and it sure feels good when you win the largest contract in company history. Especially if you know that there are 3 other deals in your pipeline that will dwarf the one you just signed! But there are 2 physics of business that apply in this scenario

Your business is only as strong as your reputation. So do not put yourself in a position that you can not deliver the value that your customer is coming to you for.

Things are never going to stay the same. So don’t bet your long term success on a short term windfall.

Here are 3 questions and 1 statement that will help you deal with the discomfort of indigestion:

 How well do you know your working capital cycle?

Cash is the oil that allows the engine of your company to move forward. Understanding where your cash is tied up, how long it takes for you to get it, and how long you can keep it is critical in understanding your working capital cycle. Click here for more information to explore your working capital cycle. The challenge for an entrepreneur with indigestion is that he/she has to balance the need for cash with the demand for growth.

What is your plan to tell your clients “no”?

Reputational risk is one of the largest risks that companies with indigestion has. I know that no one wants to tell a client “no” (especially after you have been begging them for 2 years for their business); but it is better to tell your clients no and risk loosing today’s deal; than saying yes, flopping on the execution and ensuring that you will lose all of tomorrow’s deals. Being an entrepreneur sometimes means having the courage to say no, when every bone in your body doesn’t want to.

How do you build a war chest, when you are at war?

The best time to build a war chest is when your company has steady and predictable profits, the next best time is today. A war chest is extra cash that is set aside to fuel growth or deal with unexpected changes. When a company is rapidly growing it is extremely difficult to build a war chest, as all excess funds are being invested back into the company. Just like in times of starvation, indigestion may lead to owners having to inject their own cash, seeing cash from new owners, or debt.

Profit and retained earnings, not debt, are the best tonics.

The best prescription for curing indigestion is one part time and one part retained earnings. While it is true that many companies seek debt to support their growth, if they do not structure the debt properly it can cause grave consequences for the long-term health of the company. While time and retained earnings may restrict the rate of growth, they will ensure that the company’s operational and financial systems can support the larger company.

If you are a leader of a company that is in either of these situations, your leadership and vision are critical. You know that being an entrepreneur is one of the most difficult and demanding things you can do. The good news is that entrepreneurship today is a team sport. Hit the connect button on LinkedIn or Facebook NOW and together we will start maximizing your profit, strengthening your leadership skills, defining your strategic vision, and using your bank as a strategic advantage. When we connect, tell me your choice: megalodon or lighting rod. 

Greg Martin is an entrepreneur’s insider to the banking industry and passionately believes that every person was uniquely designed for a higher purpose and calling. Greg guides entrepreneurs in defining and achieving their purpose and calling. His deepest passion is living life with his wife and their wonderful son.