What Can Small Business Learn from US Debt
On Monday, as the stock markets were continuing to crash at lightning speed, someone asked me my thoughts.
I told them welcome to the crash of 2011!
And while the 16% drop in 10 days is only the third time that has happened in 4 decades (also 1987 and 2008), this volatility may be continue for some time.
For two reasons:
1) Wrong Measurement Tool— GDP, gross domestic product. Currently we measure the success of our economy based on how much we increase our consumption. When the US was the only country (primarily) doing this, we could basically get away with it. But with the entire planet now trying to do it, it is unsustainable.
2) Standard & Poors’ Message— downgrading the US Government’s ability to pay back its debt. While it isn’t S&P’s reason, the main one from my perspective is #1 (above). This was magnified by the clear demonstration this summer of government’s inability to function as a unit. The message became painfully clear– they do not have the best interests of the country in mind.
Imagine running your company this way?
For example, let’s say you have a company that sells handbags. For years you have been doing well. Your reputation and revenue has been the envy of the industry.
Then slowly the competition starts coming in. They start undercutting your prices and going after your most loyal customers.
As sales start to slip, you increase your marketing budget to try and keep them at bay.
But they keep coming at you.
You cut your prices and work your employees harder. To cut expenses, you use less expensive labor and materials.
As a result, the quality of your handbags drop. Customers are less happy with your brand.
Now you need more money to pay bills and increase your marketing, so you take out more loans.
Meanwhile your employees and managers, mostly stressed to the max, start blaming each other for the mistakes and wrong turns the company has been making.
Next you find the banks have increased the interest rate on the debts you owe them.
One day you wake up and ask yourself how you ever got into this mess.
How to manage the debt crisis in YOUR business:
1) Good vs. Bad Debt— “Good” is debt directly attributed to generating money for your business, via sales and reduced expenses. When looking at borrowing, always ask yourself, “What is the ROI on this purchase?” (ROI= Return on Investment). The answer should be a multiple of what you invested in it, like “10X”. For example, when I borrow $100, it is good debt if it will generate at least $1,000 in return.
2) Too Much vs. Right Amount of Debt— risk and ability to pay it back are needed here. Risk = O * P, where O= possible outcome and P= the probability of that outcome. The closer that number is to “1”, the better. There are risk assessment tools online to use.
3) Leveraging Debt— irregardless of your debt position, use it as an opportunity to innovate and recreate your company’s direction it is heading. For example, use the fact you have your debt to it to create urgency for needing to find new opportunities for your company to capitalize on. Use it to create more abundance of money and happiness in your life.
4) Ramp Up the Team— focus on teamwork and checks and balances. Make sure everyone is clear on the UnReasonable goals and challenges ahead for the business. And they are all in this together. As a team. This will most likely involve compromise. For successful compromise, it is crucial to leaving the ego out.
5) Stay focused on the greater good— for all your stakeholders. You will need to define this with your team. Use it as a decision making process as you work your plan forward.
6) Pay Attention To Your House— stakeholders are most likely watching your movements. Whether it’s your creditors or communities, social media can change things for you on a dime. Stay prepared, ready to respond and adjust when necessary.
7) Redefine Success— and what it means to you. Perhaps the best way to measure success is not on how much we buy, but how happy we are. Now that’s UnReasonable! Imagine what that would do to who is #1 in the world. For example, the US would probably be towards the bottom and Costa Rica towards the top of the list of “happiest” countries.
So, I think the S&P downgrade was a good thing. It is a wakeup call that our management team and priorities are a bit out of whack.
And with the right focus and intentions, we will adjust our sails and move through these economic challenges to stronger, more grounded country and planet.
Action Steps For the Week:
When was the last time you evaluated the state of your company’s debt?
Do you feel pressure or comfortable about your cash position?
If you feel comfortable, review it to see how much you have to cover your basic nut (i.e. monthly expenses). Set up a plan to have 3-6 months as a cushion.
If you feel pressure, review the steps above. Determine where your debt situation is from a risk vs. reward of spending your money on certain investments in the company. Calculate it from three scenarios: low, medium and high likelihood in happening.
Next, determine if it is primarily “good” of “bad”. Remember, if it is generating revenue for you, it is good.
Declare the answer to your team.
Use your formula for the ROI for any capital infusions (i.e. “10X”).
Then get clear with your team and ensure they work well together and will work together through the challenges ahead.
As a team, define what “the greater good” means to your company. Make sure the team stays focused on this.
Lastly, make sure you integrate the happiness component. What does this mean for you and how will you measure it going forward.
With all this in place, look for ways to leverage this company direction with your customers.
Doing these steps will most likely surprise you in how quickly and fun this will be for you.