It may seem fairly obvious that the cause of the demise of most companies is that they ran out of cash flow. It is the equivalent of running out of blood and going into shock at the personal level. The cause of that demise, that running out of funds may appear to be a loss in revenue, unexpected market trends or even bad luck, but in reality, more often than not, it was because it was preceded with overexpansion, with unrealistic optimism or of hoping that the future would save the company out of the mess of the present.
It is a fairly common experience that companies have an ebb and flow; an expansion period followed by a contraction period. What many planners fail to take into account is that it is the expansion part of the cycle that often lays the foundation for doom.
Why is that? Because during the expansion cycle what is often missing is restraint, reality checking and good management. During the expansion cycle there are more funds available. These funds may be in the form of loans or public stocks and what makes things dangerous is that there is an optimism in their use that overrides common sense. It is like a couple that finally got a loan approved for their house and they go on vacation to celebrate, when they have not sat down and calculated their real financial situation. Many companies have made this mistake.
A very large photographic supply and photo processing conglomerate decided to expand during the late 90's by purchasing a warehouse several times larger than they needed. The company seemed to be in very good financial shape. It held a virtual monopoly of the photography supply business in the city. With this expansion, it was presumed that they were 'planning' for the future. The staff were excited with the indoor trees and open office concept that the architect had designed for the showroom component of the warehouse. Of course with all of the that space, supplies were ordered and customers were informed with advertisements of both the opening gala and that they were invited to visit and shop.
It was a grand idea except for several things. The construction, furbishing and stock of course went over budget and ate away both the funds and the cash flow putting the company into a critical position. Nobody had analyzed the way the market or technology was heading.
Basically the experience of the past was used to project forward, and growth was assumed. This was a time when personal computers, scanners and printers were beginning to displace photo processing. Video cameras were beginning to replace conventional movie cameras. And digital cameras were beginning to displace the photofinishing market. In effect almost everything that company had purchased in stock was being displaced and was losing value sitting on the shelves. The whole chain went into receivership.
Could the failure have been avoided? Of course. It meant taking a very hard look at where they were, where the market might be going and what the consequences of tying up so much of their resources might be. It meant that the enthusiasm had to be balanced with reality checking, and not to allow very basic financial and economic lines to be crossed just because it felt like it was a good idea at the time.
Often mistakes are made because companies move forward into the future from their pasts rather than taking a harder look at the present. It can happen if there is too much reliance on the ways things have always been done, and it definitely can happen if middle and upper management isolates itself from the rest of the company. These are symptoms that the company has become less vital and is less willing to learn and to listen. These are symptoms that growth is not occurring from where it should be, from within, but instead is being replaced from the outside. When this happens, the projection of growth is suspect because the perceived expansion is very artificial; it comes from the wrong places and that kind of growth can have disastrous consequences.
Originally Published 2010. Copyright © 2010-2012 by Roman Oleh Yaworsky. All rights reserved.
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