(But We’re Making it That Way!)
When it comes to the national economic situation, the numbers are so large that we are blown away and feel unable to think about them in rational terms. True, they are large numbers. But many of us have learned to work on situations of financial distress for small companies and large, as well as people with small debt and small income and those with large debt and large income. The principles are the same.
If a client (company, family, individual or city) spends more than it takes in, there are short- and long-term consequences, as well as short- and long-term strategies to deal with it.
Strategies fall into a few basic categories, generally always a permutations of either:
1. Charge more for what you sell.
2. Spend less to produce what you sell.
3. Sell more of what you sell.
Get more money! Increasing revenue is a good thing. How one does that depends on the circumstance and whether the client has the ability to sell more product, get a better (or second) job, bring in a strategic partner, etc. In a small business, the owners can work harder, provide more services (or value) and advertise to create more volume. These are but a few of the options. Sometimes the client can discount its products to create more volume and more cash (while, this may present some issues on the back end if the basic cost structures and markets don’t change). However you do it, getting more revenue is important. Selling unused (or under-used) assets can help. Collect accounts that are slow pay. Sell unused raw materials. Lease or sell unused capacity. Clean out the garage and have a garage sale.
Spend less money! Cut expenses that can be cut. Do more with fewer employees. Eat out less often. Get non-working family members to work instead of paying staff. Negotiate reductions with vendors. Create efficiencies.
As a business, credit and bankruptcy lawyer, I have been involved in literally thousands of discussions about how to fix financial problems for people and businesses. It generally comes down to the same thing. And everyone knows what to do, but the most common response is: “If I do X, it will only affect the cash by a small amount and it won’t fix the problem. A business that comes up short by $10,000 every year could cut out free coffee in the kitchen and save $200 a month, but they perceive that as so small as compared to the $10,000, they don’t do it. They look for the $10,000 solution and there isn’t one. If it were that easy, they would have done it already! Think about finding $1 trillion of shortfall and how hard that could be if we are looking for the $1 trillion solution!
These problems are generally solved by taking a number of small steps simultaneously. Slow the bleeding (if you can’t stop it). Sell some languishing assets. Find some increased sources of revenue. Negotiate some cash savings with creditors. These are but a few of the options that struggling families and companies look to. None of them solves the problem by itself. Maybe all of them together only slow the slide until the economy comes back (or the big customer settles its strike or the next budget year starts and the other breadwinner gets back to work or…).
But you have to do something or, more appropriately, a bunch of somethings. And you have to watch the results closely, track them to see how it is going. You also have to keep finding new things to do to cut expenses, build revenue, slow cash outlays, and so on.
Sometimes if you delay too long and fail to see the cliff ahead of you, you’ll fall off that cliff. That, in my experience, comes most often from either following a single decision maker who makes the wrong decision (certainly a risk in a small business with a strong personality at the helm) or from analysis paralysis (thinking about things so long that you do nothing and drive off the cliff).
Former Senator Everett Dirksen is credited with saying “a billion here, a billion there. Before you know it, you are talking about real money.” The flip side of the numbness we feel to these large numbers is that we feel the inability to affect them unless we are affecting large numbers. That is a fallacy. Small impacts multiplied by large instances create large impacts.
If we have a $10,000 deficit this year and we cut 5% off of every expense, we save $500. If we cut out a few dinners, movies and concerts altogether, we will be sad for a while, but we’ll save $1000. If we take the bus instead of drive to work, we’ll save another $500. Stop smoking and save $500. Right there we have $2500 of savings. Then we look to increasing revenue and cashflow. A part time job for a family member. A reduction of staff by 1 person. Before you know it, we are talking about real impact.
In making these decision, we have hard choices. If the decision maker really likes to smoke cigarettes, but doesn’t care as much for movies, it will likely result in not cutting out cigarettes, while cutting out more movies. These are choices that can be made. Making them is hard and if we have too many decision makers who are also unwilling to compromise because they are trying to make long-range philosophical impact, there are lines in the sand which we will be be able to cross. That will prevent us from making any decisions about driving directions, speed and distance, causing us to argue while the car drives off the cliff.
Pretty simple, huh?