Only when the tide goes out do you discover who has been swimming naked
— Warren Buffet
The tide is going out. Businesses are failing every day.
I’m not just talking about restaurants, bars, and airlines. You are seeing a wave of businesses that shouldn’t have been affected by this slowdown.
Why are these businesses failing?
What is causing so many people to be laid off so quickly and without notice?
Focusing on the Wrong Things
Have you ever heard a business owner talking about the size of their business, using people as a metric? “We are 125 people now”. “We just hired another 50 people”.
Business owners used to talk about metrics like sales and profit. Now it seems the size of your team is the most important thing.
Usually, the business is being overwhelmed with growth, and instead of working on systems and operations to correct the problem, they just throw more people at the issue.
This cycle goes on and on until there is a market slowdown. Suddenly 1/3 of the team is let go within months or sometimes just weeks.
Companies have started hiring employees, matching the company’s exact cash capacity. Companies can’t cashflow employees for a 3-month slowdown. Most can’t even cashflow a 1-month slowdown!
So how do you cash flow all these new hires every month?
Debt
It’s not just consumers who have been getting debt hungry for the past decade. Businesses are holding record amounts of debt. Corporations either have piles of debt or piles of cash.
If you want to know the true health of a company, look at their balance sheet. Companies that take on loads to debt to keep their operations going are destined for a crash.
If you need a mountain of debt to operate your business, then you’re business is not financially sound. Many hotel operations are struggling right now because they can’t service the debt on their properties. They have only been closed for a few weeks!
Growth above all else
Executive: “Our business is growing 8% annually year-over-year.”
Market: “Boring!”
Executive: “We could increase our marketing push and aim for 11% growth”
Market: “For your industry niche, we need to see 30% year-over-year growth”
Above is the expectation facing every entrepreneur, business owner, executive, and manager. Does this seem reasonable, or sustainable for most businesses?
Growth is an important factor of every business, but the expectation that these multi-billion dollar goliaths are going to keeping growing 8 – 10% every quarter is just nuts!
Reset Everything
The people of this world are getting shocked into a state of priorities. Food, Water and Toilet Paper became more precious this month. Grocery shopping in most states increased up to 90%.
It is going to take years for consumers to forget the sights of empty shelves at the grocery stores. The new normal will be to keep a month of long-term food on hand, and many families will keep much more.
This spending would normally go to eating out, vacations, fancy coffees, etc. Companies are going to need to fight extra hard for those consumer dollars.
Some Companies Will Thrive
There are many companies you probably don’t give much thought to. They are un-sexy, boring, and produce everyday products that, up until last month, you took for granted.
Staple food companies like Hormel Foods (maker of Skippy and Spam) or pharmaceuticals like Pfizer (Advil and other drugs) will do well.
Companies that provide alternatives to public gatherings will see a continual growth cycle. Peloton is positioned well to convert a lot of gym-goers.
Grocery stores will see a boom in sales and community support. As of this writing, grocery store clerks are being treated like war heroes.
Many Will Not Make the Cut
There are many companies that will not survive the transition. That’s okay.
It’s a natural cycle and one needed in business. The last cycle allowed us to shed a lot of bad banks and investment firms. Banks are now stronger and able to adapt to hard times.
Many businesses are overleveraged and are struggling already. We have already seen a few companies ask for bailouts and more requests will be coming. Some of them will be worth saving, and some of them not.
If a business has taken on too much debt, it’s important that we NOT bail them out. This sets a very bad precedent that companies can get all the rewards for taking on more risk because all the risk will be moved to the taxpayer.
Online Shopping’s biggest years are ahead
Everyone in the world is trying to order everything online.
New online shoppers are being created every day. They are experiencing the ease of online shopping and having things they never imagined shipped right to their door.
If you ever wanted to start an online store, there has never been a better time. You can provide much-needed products to an entirely new customer base.
You don’t have to close your retail store to move online. Use your retail storefront as a showroom and credibility mark, and the back half of the space for shipping and receiving.
Advertising After the Reset
Advertising dollars will have to increase in order to convince a consumer to part with their money and buy a new product or service. This will be great for companies like Facebook and Google, but not so great for small retailers.
With advertising costs going up, the cost-per-acquisition (CPA) will largely increase. Some funnels will no longer be profitable, and savvy marketers will need to find a new way to advertise to their target market.
Health and Wellness advertising guidelines will become much stricter. There has already been a crackdown by Google, Facebook, and others.
Credit is Going to be Harder to Get
Going into last fall, banks were already having a rough time. More retailers were going bankrupt. Gas and Oil companies were having a tough time meeting their obligations, and the American debt load was continuing to climb.
Now let’s throw in a pandemic, an oil price war, along with 20%+ unemployment into the mix. Banks will be dealing with a record number of defaults, late payments, and possibly a high number of foreclosures.
While the banks can handle this, it will put pressure on their current lending operations. Without the government backstop loans, the banks will need to tighten their lending criteria.
Banks also won’t make as much money on their cash reserves, as the Fed will cut the rate to zero and possibly even into the negatives. Cash savings become useless as an investment vehicle.
If you already have an established relationship with a bank and have maintained a good payment history, then you won’t have a problem. New business owners and startups will have the hardest time and will have to look at private options.
Action Steps for the Reset
How do you prepare yourself and your business for the time ahead? The good news is, history always repeats itself.
Having consumers care more about the groceries in their fridge than the car their driveway, is not new. It happened in the 30s during the Great Depression and again during the Cuban Missile Crisis.
Both times the human race adapted and came out stronger. It took a few years to get people spending on luxuries again, but eventually, they did.
Here is how you should be preparing your business for The Great Reset:
Make your service or product a NEED, not a WANT.
You need to make people NEED you to survive. Any kind of want can be discarded in tough times. The more critical you are to the operations of a business, the better.
WANTS: Cars, Office Space, Clothes, Gym Memberships, Hulu+, etc
NEEDS: Internet, Cell Phone, Gmail, Accountant, Legal, etc
Learn to sell online
Your business might rely on flying out to clients and meeting face to face. Not only is that no longer necessary, but it’s also inefficient.
Learn to sell online and modify your sales pipeline to match. You need to be able to reach customers in every corner of the world.
This has long been the promise of the Internet. It’s time you start taking advantage of it.
Sell off any non-critical assets you can to pay off debt
I became a millionaire by borrowing money at 6% and investing it at 8% – Nobody, Nowhere
I understand that sometimes you have to go into debt to make certain things happen. Buying a house, starting a business, leasing a car (don’t do this one).
The problem comes when you’re using debt to accelerate an action or defer another action. These two situations lead to compounded problems in the end.
Deferring an Action: I can’t pay my employees now, so I’ll take on debt to pay them. Next month you’re going to have the employee payments plus the debt payments.
Accelerating an Action: This project is going to take me 18 months with 10 employees, so I’ll get 20 employees and have it done in 9 months. This logic never works and fails to account for the diminishing returns and overhead of each employee.
If you run a profitable business and carry little to no debt, banks will throw money at you. At that moment you can decide if you want to use the cheap money to expand. Don’t go looking for debt to solve a problem.
Nobody truly knows what is going to lie ahead for businesses in these changing times. A good reset every decade or so is predictable and survivable.
Take care of your business and adapt as needed. Tomorrow won’t be like today.