Every year at this time, our Dr. Diesel™ gets into the eggnog. Sometimes way too much. As a result he turns philosophical and writes another segment of his How to Series. For an earlier installment, Six Dr. Diesel's Steps to Success click here .
Maybe at this point you're thinking, why is an engine parts guy writing a series of How To's for emerging business leaders? What does this have to do with supplying Deutz, Perkins and Deere engine parts? Twin Disc® and Rockford PTOs for wood chippers? Exhaust scrubbers for diesel engines? Well, our Dr Diesel believes strongly in passing on to younger people hard earned lessons. He also knows that if he can help develop a stronger industry it will be better for everyone. In other words, stronger, better companies, both customers and vendors, is a win/win for everybody.
But this year's installment is different. Rather than some tips on how to succeed in life or build a business, this is called How To Kill A Company in 6 Easy Steps. Because Dr. Diesel™ works in the engine industry, most of his examples will come from his experience. As you read these, reflect on how many of these 6 Ways to Kill a Company, involve inflated egos and bad judgments.
1) Excessive Debt
Every year Forbes Magazine publishes a list of the world's wealthiest people. You would think that once you're on the Forbes list that staying on it would be easy. It's not. The reason: excessive debt. Leaving deaths aside, only 15% of the people on the original Forbes 400 were still on it 21 years later. Many people borrow heavily. Debt is a two edged sword. When things are going well, it is great. But in times of high volatility such as now, it can be punishing. Just ask Donald Trump. You can easily kill a successful business with excessive borrowing. Just ask Donald Trump. All it takes is one bad quarter. Then you cut your prices to keep the volume up and your people busy. As a result profits drop, payables increase, suppliers get nervous, investment in inventory slows, customers drift away, the banks call in the loans, and the business is closed. Smart people know this and are fiendishly concerned with excessive borrowing. They want to control their destiny.
2) Excessive Receivables
In their haste to grow their business, people often manage credit poorly. They often don't relate it to their business model. You can sell only on two of the following three variables: price, availability and quality. If you truly think you have a unique value proposition, you shouldn't be hesitant about asking for prompt payment. If you don't think you have much to offer because your product or service is a commodity item, just like everyone else, then maybe you need to change your model or close the business.
In their desire to grow the company, people often chase sales volume by chasing new customers. Did you ever wonder where the new customer came from? Why they decided to buy from you? It may not be your good looks and abundant charm but rather your very loose credit policy. Maybe you like the status of selling to a Fortune 500 company open account. Somehow you think that it elevates you.Be careful. Poor credit controls can kill a company.
Look at the Purchase Orders issued by large companies such as General Electric. In their POs they dictate to you your terms. GE says that they don't intend to pay anyone, except attorneys, sooner than 90 days. Who needs this attitude? Here's a tip: ask Fortune 500 companies to use a credit card. Dr. Diesel™ assures you that Jeff Immelt is not going to take you off his Christmas card list if you refuse to wait 90 days for them to pay you. Maybe a large manufacturer of green tractors wants to buy from you? No problem. Just ask them to run the paperwork through their third party expediter. You'll get paid as you ship. US airlines should also pay you when the service is performed. Every time an airline goes into bankruptcy and many have made that trip twice or more, a lot of people get hurt. So much so, that they never recover. Research indicates that when an invoice is over 90 days old and unpaid, the chances of being paid in full decrease dramatically. Remember, as Dr. Diesel™ says, "engines run better when they are paid for."
3) High Fixed Costs
A few years ago the-then Hyster forklift dealer in Boston moved his company into an 80,000 square foot building in the suburbs. The building was impressive. So wasn't the rent. But let's run the numbers. Let's assume a $10 a foot annual triple net lease agreement. You wouldn't have much change left from a million dollars after you paid the rent, heat, lights, taxes, and upkeep. This might be OK if it added something to the value proposition. But it didn't. No one is going to pay more for a forklift because it comes out of a lavish building. Sad to say, this two generation family firm is now gone, done in by high fixed costs caused by an ego driven decision.
On a related note, a lot of people laugh when an owner walks around the building turning off unnecessary lights and air compressor motors. But he knows that John Maynard Keynes was right. There really is no such thing as a fixed cost. In the end everything is a variable cost and they can be a killer if not controlled.
4) Poor Marketing
The amount of money blown on poor marketing is staggering. Before you agree to sponsor a golf tournament, exhibit at a trade show, or even buy a display ad in a glossy trade publication, ask yourself what the cost per exposure to a current or prospective customer will be. Please don't kid yourself with the old reliable "Oh, well, it will at least get our name out there." That's a cop-out. Ask yourself if your customers even play golf, go to trade shows, or read glossy trade magazines at home after work. Most people don't. Ask yourself if the marketing spend decision is ego driven on your part.
Poor marketing is even worse than no marketing. If you don't spend any money on marketing you know it and are not kidding yourself that you are marketing. Moreover, should you decide to start a marketing program you will have the funds to do so. As an idea, rather than waste money on sponsorships, trade shows and the like, consider a real marketing program that differentiates you from everyone else and establishes your brand. Maybe a marketing program that starts with weekly thank you notes to your customers. Now, that would be different!
5) Excessive Cash Distributions
This one is hard to avoid and it happens all the time. After the early lean years, a company begins to grow and does well. So well that there is pressure to take money out of the firm. The principals want to live as well as their friends who are salaried employees in large companies, medical practices or law firms. The difference is that these people are building careers not equity.
As long as you can get a profitable return on your investment you should reinvest in the company and grow it. After all, the name of the game isn't to have a high W-2 income but to eventually build up the company and cash in. This means reinvesting the profits. Grow the company now and cash in big later. Forgo the golf condo in Florida. Leave the 100K dream kitchen rehab project to the doctors and dentists in your neighborhood. Put the money back into the company and watch it grow.
6) Growing Too Fast
This one happens more often than you think. Here are two examples.
A guy gets out of the army and has $6000 saved from his combat pay. He picks up a used Kwik Way boring bar and a Van Norman crankshaft grinder and goes to work in his family's garage. Twenty five years of hard work later, he is a production engine rebuilder living the good life in Southern California. He has 125 people cranking out passenger car engines for resale. Everyone loves him. His major customer is a national retail chain (think Sears or K-Mart). They operate automotive service centers. They're 75% of his business. Suddenly, there is a parting of the ways. The national chain no longer is going to install rebuilt engines. Not only does he lose his best customer but they owe him a significant amount of money they've been holding back. Money he didn't dare push them to pay because after all they were his best customer and so what if they were running 90 to 120 days. The situation results in acrimony. They have more lawyers than he does and so they sue him in a court 1000 miles away. They tie him up in court. His cash flow slows to a halt. The bank comes in to repossess the equipment he broke his back to buy. End of the company.
Second example, a guy sits down with a friend and drafts a business plan to revolutionize the automotive starter and alternator business. Using R L Polk vehicle registration data they decide to lease a fleet of compact pickup trucks stocked with the 20 fastest moving part numbers in starters and alternators in their metro area. The trucks are equipped with off-the-shelf Garmin GPS systems so that they know at all times where the drivers are and can guarantee deliveries within 20 minutes to local garages. They even have four large straight trucks prepositioned in shopping center parking lots in each quadrant of the beltway around the metro area. These mobile warehouses act like mother-ships. They have inventory deeper than the top 20 numbers and can resupply the compact pickups during the day. To avoid turnover in drivers and to keep their insurance costs down, they hire retired guys with good references. Good guys (retired school teachers, mailmen, cops and the like).
Business is booming. Life is good. Inc. Magazine names them to their annual list of fast growing companies. The business grows so much that they run out of retired guys and now have to hire young men as drivers. Not all are US citizens. They pay them under the table as "contractors". One has a bad accident and kills someone. The under the table employee isn't covered by the company's automobile insurance because of his age and "contractor" status. The relatives of the deceased sue. They attach the company assets. Can you hear the doors to the company close?
We hope that this has stimulated some thought. Dr. Diesel™ takes mentoring seriously. He would welcome your comments at DrDiesel@FoleyEngines.com or call him at 800.233.6539. For a look at our Dr. Diesel™ Tech Tips, click here.
Best wishes for the New Year!
Manufacturers names, symbols and numbers are for reference purposes only and do not imply manufacturing origin.