Don't Be Caught With Your Financial Pants Down

Don't be caught with your financial pants down

You can’t hide poor financial management forever. 

When your business is growing and top line sales are on an upward trend period after period it’s easy to miss red flags in your financials. Things like decreasing margins, increasing costs, and shrinking cash balances are often masked by growth: if revenues are up 10%, who cares if margins are down by 2%? 

The thing is, you can’t hide behind growth forever.

Eventually, your decreasing margins, increasing costs, and shrinking cash balance will catch up to you. 

You’ll be forced to confront these chips in your financial armor when the environment that you operate in changes. Unfortunately, human nature is such that we often think good times will last forever and that bad times will too. Neither is true; if you look at the cyclicality of our economy, recessions do always happen. And it’s not just recessions that will force you to come out of hiding: shifts in consumer tastes, new entrants into your market, and other industry changes are inevitable as well. Just because you’ve been growing in the past, does not guarantee you will keep growing in the future. 

The coronavirus crisis is a good, albeit extreme, example of what happens when we don’t plan for, or expect, the worst: we are surprised by it instead. And when it comes to your financials, you don’t want to be surprised by the things you should have seen all along. 

The thing is, you can’t hide behind growth forever.

Let me give you an example from a client of ours; their business had been growing at a steady 15-20% year over year for the past 2 years. As they grew, their costs grew as well; salaries got larger, the number of people on staff increased, marketing spend went up, and gross margin went down. But, the amount of money flowing through to the bottom line was still trending upwards. Management was happy. Fat and happy. 

Cue the coronavirus crisis. All of a sudden 15-20% growth is not a given and the management team has to confront what they should have been looking at all along: why were their expenses so bloated and why were margins decreasing when they should have been increasing with growth? 

A crisis is a bad time to confront poor financial management decisions. 

A crisis is also a bad thing to waste; while you should exhibit healthy financial management practices all of the time (and even more importantly when things are going well and you have the resources to focus on it), if you can quickly correct course when your circumstances change it is far better than staying in hiding forever. 

If you find yourself forced to confront financial management mistakes that you were hiding behind when times were good, all is not lost. The first thing to do is act quickly; recognize your mistakes and work to fix them as fast as possible. The second thing to do is to remember that this too shall pass; the good times will come back, and if you can remember when they do that they also will not last forever, this experience will not be for nothing.