Why some companies stay poor
Though most companies start small, the dream of many is to grow into big business with a range of services or products designed to make life better for their clients and customers. They also plan to have subsidiaries, leveraging the opportunities available in the industry as well as the environment. While some live this dream, most chase it in perpetuity without actually experiencing it. Though some companies remain small by preference, most are not able to make the transition from being small to becoming big. Some die in the process while others barely exist.
According to a research conducted by Jessie Hagen, Vice President, Small Business Administration, at Byline Bank in the United States of America, poor cash flow is the primary reason small businesses fail to grow. According to her, 82 per cent of small business failure is traceable to poor cash flow management, while 79 per cent of businesses fail because they started out with inadequate funding. Therefore, cash is the single most critical survival factor for a business. If a business has challenges with cash flow it will struggle to exist and experience sluggish growth. It is highly unlikely to make it into the big league.
But the problem with illiquidity is deeper and much more serious than cash shortage because the poverty of an organization conditions the thinking of its people and they are unable to generate creative ideas that will get them out of the poverty circle. Some researchers at Princeton University found out that poverty and all its related concerns require so much mental energy that those battling with shortage have less brainpower remaining to devote to other areas of life.
The researchers aver that being poor may keep a person from concentrating on the very avenues that would lead him out of poverty. According to the finding, a person’s cognitive function is diminished by the constant and all-consuming effort of coping with the immediate effects of having little money, such as scrounging to pay bills and cut costs. Thus, the person is left with fewer “mental resources” to focus on complicated, indirectly related matters such as education, job training and even time management, all of which are necessary for him to experience the desired change. So, poverty keeps the poor so embroiled in their lack that they can’t break out of that circle to generate more.
As it is with persons so it is with organizations. Companies that struggle with cash flow are totally consumed by their shortage and how to survive it that they never get to taking decisions that will extricate them from the scourge.
How poor cash flow affect organisations
Poor cash flow affects organisations in a number of ways. Here are some of them.
Too engrossed with survival to see opportunities
A company that has cash flow challenges runs a shoestring budget because money is never enough to finance its activities and projects. Consequently, rather than focusing on opportunities that could take it beyond its current level, it concentrates on meeting daily obligations. So, an organisation like that is more interested in living from day to day than in planning for the future. Such organisations cannot come up with long-term vision because the whole of its attention is on making it till the next day. All hands are on deck to pay suppliers, contractors and staff such that exploring opportunities that may be available in the industry and the environment is not given any priority.
Too careful to take risks
Organisations that have issue with liquidity are not emboldened to take risks. They usually prefer to play safe and put their limited resources in business investments they are 100 per cent sure will yield a return, not any business that has a chance of going awry. But a company that does not take risks cannot grow big.
Confused and discouraged after many months of working on their search engine without getting the desirable result, Larry Page and Sergey Brin, founders of Google, decided to sell their invention to George Bell, CEO of Excite for one million dollars in 1999. The twain arrived at this decision because they had put all their money in the invention without the expected outcome. In addition, building the search engine was taking too much of their time and affecting the completion of their graduate studies. So, they decided to let go of it. But when they got to Bell, rather than give them $1million, he offered them $750,000. The duo exchanged glances and decided not to sell their invention for that amount. They decided to “rather go broke than sell the search machine for that pittance.” Though disappointed by the turn of event, they chose to hold on. Their decision paid off as a few months later some venture capitalists, Kleiner Perkins Caufield & Byers and Sequoia Capital, put $25million in the business. That was the turning point for Google, which today is one of the largest companies in the world.
Cash crunch almost forced Google founders to sell their fortune for a trifle. But they stopped at the last minute. Not many companies with liquidity challenges are that fortunate.
Cannot build momentum
Organisations that are in short cash supply lack the patience to allow great ideas to crystallize before moving on to something else. For the reason that they are short of cash, such companies are always in a haste to make things happen fast. Consequently, if they try an idea and it does not immediately result in money, they try something else. Such companies are consistently inconsistent and their inconsistency results in sustained shortage.
Unable to attract right personnel
The only factor of production responsible for wealth creation is labour. But for a company’s personnel to generate required revenue, they must possess the right skills set as well as the right attitude. However, organisations that have cash flow issues hardly go for top-rated employees with proven ability to pull in the kind of resources the organization requires to break the poverty cycle because of cash consideration.
How companies break poverty cycle
Companies can break the cycle of illiquidity by taking the following steps.
Change your thinking about the situation
The words of Albert Einstein remain true. According to him, a problem cannot be solved at the same level of thinking that produced it. This means every situation, good or bad, is a product of a thought process. A situation remains the same until there is a change in the thought process that produced it. So, to move from illiquidity to buoyancy requires a change in the thinking process. Abundance is a product of a thought process, so is shortage. If the domineering thought in an organization is shortage, the company will experience shortage.
This may look insignificant but the truth is that every action taken by a company is a product of a thought. The strategy deployed by a company is derived from a thought process. So, if the domineering thought in an organization is dictated by the unsavory situation the company is undergoing, its decisions and actions will be determined by its situations and breaking the cycle will be herculean. Even in difficult times, the actions of great companies are dictated by vision, not their current realities.
The leadership of an organisation that is going through difficult times is changed only when the board comes to the realization that the leadership is unable to make a shift in its thinking from what is to what should be.
When Apple faced illiquidity and stock slump in 1997, the board wanted a new thinking in the organisation but the CEO at the time, Gil Amelio, seemed fixed in his ways and was unwilling to try anything else. So, he was eased out and Job Steve was returned to the company. Steve went into the job with a new thinking and the fortune of the organization changed gradually. So, it is critical to develop a new thinking so as to take new steps that will take the organization out of its liquidity challenge.
Go against the grain
Change cannot happen without a change. Isaac Newton’s First Law of Motion states that a body at rest will remain in that condition unless an outside force acts on it. So, what births the change a company needs is something that it is not used to. If a company keeps doing what it has always done, it will keep repeating its past experiences. Poor companies remain poor because they never step out of their familiar zone in spite of the discomfort they face. Leadership is nothing without courage. It is the call of leaders to make tough calls and take difficult decisions. So, the leader has to lead the organization against the grain to escape the rut. The company has to try something new to get a different experience.
Never wish things were easier
Jim Rohn counsels that no one facing difficulties should wish things were easier. Instead of travelling that route, wish you were better. Wishing things were easier will encourage you to look for an alibi not to do what you ought to do. A situation will change when there is a determination to change it. So, what a leader whose organization is faced with illiquidity should do is to increase his capacity as well as that of his team mates. There is no situation an organization finds itself that some others had not been through. Find out how what got them out of the pit and apply the principles. Situations surrender when confronted by men that are armed with knowledge.
Have a long-term plan
One of the factors that keep poor companies in the poverty loop is the inability for long-term projection. They usually think short-term and that limits their ability to take the right decisions that will enable them to get stronger and become more buoyant on the long run.
Current realities are the results of steps taken in the past. The realities of the future will be determined by actions taken now and the plans that are put in place now. Great changes don’t happen overnight, they happen overtime but only to those who plan for them. Therefore, to get out of illiquidity, companies must have a long-term plan and execute the plan because an unexecuted plan is of no use to the planner.
Getting into illiquidity may be accidental but remaining in it is not.