Fear Is Harsher Than Reality

A client – let’s call him Bob – came to me after ignoring the symptoms of his business problems for a long time. He challenged me to write this column because he felt I had a responsibility to wake up others who are hurting themselves by ignoring problems instead of dealing with them. These problems can often be solved if people come to their senses and get help before it is too little and too late.

When “Good Practices” Are Bad

Ignoring problems is easy to do when you cannot recognize the symptoms.

Often we miss the symptoms because we mistake bad actions for good ones. For example, paying cash to make improvements or to buy equipment. Paying cash is better than borrowing, right? Not necessarily. It is only better to pay cash if cash is actually profit that you are re-investing in your business. And if the investment is a wise one.

Just because there is extra money in the account does not mean any of it will become profit. Cash that is misused in this manner is usually cash that will be needed to bridge times where expenses exceed income. If your cash-flow budget is not updated and in everyday use, it’s easy to make this “good use” mistake.

Only with a thorough understanding and application of basic cash flow management principles can you recognize this sort of basic bad judgment; otherwise you will be blindsided.

Another sign of poor practices that can be mistaken as good is when your receivables and inventory are reduced. This is a good sign only if it means that older payments have been collected or that stale inventory was liquidated.

But lower receivables can also be a sign of lower sales. And reduced inventory can be a sign of out-of-stocks or starving the selection in retail. Both of these may provide a false-positive sign in terms of financial health but they can also present an immediate problem with forms of financing like a bank operating line of credit secured by receivables or inventory.

Recognizing the loss occurred, and where it happened, is necessary to prevent even higher debt and depleted equity. In most cases it takes the proverbial call from the bank before anyone takes action.

Unfortunately, finally acknowledging the problem does not mean it won’t get worse before it gets better. It doesn’t even mean that it will get better.

Denial Is Coping Of The Last Resort

Just a couple weeks before losing her job, a general manager told me, “Denial is underestimated as a coping mechanism.” Her organization was operating with negative cash flow for two years running as their “ample” savings eroded.

When presented with this problem by an influential board member, her response was, “We still have a lot in savings.” In other words, she was unwilling to address the problem until there was only one other choice – to go home without a paycheck.

It is much easier to ignore and deny symptoms when you or a family member are co-owners and operate the business. Neither party really wants to discuss the problem that both often know exists so nothing gets done about it until someone speaks up. Often it is the banker, the lawyer or the tax man that speaks first.

Stop Hiding

We tend to stay quiet about our problems because we are afraid of being labeled a failure. Ironically, this fear can create the situation we fear most – failure – because we stick our head in the sand.

The perception we have of what people think is either a moot point because they already think it, or is much different than what they actually think. Let’s look at some other points of view:

What we think. You may have heard the old adage, “We have met the enemy and he is us.” We can become our own enemy when pride overcomes our willingness to acknowledge problems. You can’t fix problems without that step, but it is often the most difficult thing to do.

Being better comes as a result of making mistakes and dealing with the outcome of them, then moving on knowing we have done our best.

What others think. Yes, we will be judged by those who judge based on income, status and the like. The people who really matter to us see us as imperfect but striving to do the right thing to become better. They are our true friends.

It has been said that the greatest secret to misery is not talking about the things we really want to talk about. The reason for this misery is that talking is the only way problems are ever solved. Facing the people who count on us is very difficult to do, but it increases their trust in us when we admit our blind sides and problems and let them know that we’re working on solutions and want their help. We earn respect and gain credibility.

What banks think. What we worry about is not our problem alone and keeping it from someone else only means they, too, are ignoring their situation.

Business problems may be stepping stones to stronger banking relationships. A friend with 27 years of banking experience told me that knowing how people respond when business gets tough is the best determinant of being paid. Small local banks usually prefer to do business with someone who borrowed from them in the past – even if they had some trouble – than to take a risk on someone of unknown repayment commitment.

What partners think. Family, outside partners or stockholders also avoid talking about difficult things. Often when the ice is broken, partners thank us for starting the discussion because after even the most uncomfortable discussion, all parties will feel better about it. Ask an unbiased, trusted adviser to sit in on a meeting. Everyone will be more civil in expressing feelings and points of view.

What employees think. Employees often know more than we think and believe business situations are worse than they actually are. When they know they are respected and are included in identifying and implementing solutions for business problems, employees will pitch in. Overcoming difficult times together builds trust and bonds that last.

What vendors think. We perceive vendors to be tougher to work with than is in their best interest. First, they have experience working with other companies in difficulty. Since vendors depend on our continued business, they would rather cooperate than force us to sell someone else’s product so we can earn the money we owe them.

What customers think. Customers chose to do business with us in the past because they found value. We all stick with troubled businesses longer than we probably should. Toyota still sells cars to repeat customers even after disastrous reports of numerous safety-related problems were exposed to the public.

What Matters Most

It really doesn’t matter what anyone else thinks. What matters more is what we think and how our thoughts determine what we do. If we fail to keep our business going, or downsize to get through tough times or adjust to the situation we’re in, it does not make us a failure because failure is never final. We live in America where we have the civil right and opportunity to begin again.