Post by Patricia Hewitt, contributing Women On Business writer
It’s become the norm rather than the exception these days, to see the names of large U.S. corporations who are filing for bankruptcy protection or asking for large amounts of cash to keep them afloat. The major U.S. car manufacturers are just one example, but there are many more. Bankruptcy in its simplest form is the inability to pay one’s bills and therefore, is a cash flow problem. Cash is king and anytime you’re considering expanding your business, cash flow forecasting should be a top priority. In some cases, these companies got into trouble as a result of spending their cash on expansion strategies that didn’t play out as anticipated.
Therefore, for those of us not in trouble (which I hope is the majority) or thinking about launching or expanding a business, these announcements are a wake up call to always factor in the worse case scenario as one of the potential outcomes of any expansion plan. It’s all well and good to put your superhero costume on and declare yourself – READY TO RISK IT ALL! – often based on the last “I’ve made it and you can too” expert. But keep in mind the business people who are giving speeches and writing books have already made their fortunes. And unless they’ve done so within the same economic conditions that you’re going to operate in – beware the next big thing.
Instead, build into your plan a little negative reality check like so:
Scenario #1: You operate two moderately successful bakeshops and have built enough reputation and confidence to consider opening a third store. You’ve scouted out locations, run the demographics, and computed the required investment and return based on a five-year plan. You’ve also considered new staffing and new management, since it will be difficult for you to manage all three stores on your own. In addition, you will now need more administrative help or may outsource some administrative functions due to the higher number of employees. Sounds like you’ve figured it all out, but are you ready to go to the next level?
Scenario #2: You operate two moderately successful bakeshops and have built enough reputation and confidence to consider opening a third store. You’ve scouted out locations, run the demographics, factored in the operational impacts, and run the numbers on the required investment and return. Now you have the first expansion option. Next, you review the two existing operations and determine that one of them can be expanded into a larger footprint in the same location. This will allow you to devote space to new items or perhaps a few tables and chairs. You analyze and run the numbers again. This is the next expansion option. Finally, you review the two existing operations and define a new line of baked goods that can be incorporated into each store based on its existing location. Again, analyze and run the numbers. This is expansion option three.
Obviously, what’s missing from the first scenario is the possibility that there are any other expansion options. However, if you can make an investment, why consider only one? Create as many possibilities as there are cash and opportunities and keep tossing them out until you come up with most likely plan(s) to succeed. But I want to take you even deeper into considering options and get you to think about failing. I don’t mean what if your baked goods are terrible and no one buys them (you wouldn’t be able to expand if that where the case) or what if a meteor falls on both your stores (which is a made for TV movie scenario).
I mean, a forecast that will tell the bakeshop owner what the likelihood is that the economic conditions under which they are currently doing business will be maintained, will improve or will decline. How do you figure that out? One doesn’t need a barrel full of risk analysts to figure this out; there is a great deal of information to be had through investment firms, government publications, and library researchers. In addition, you have your local business banker, business school professors, volunteer business advisors, and peer networks. Reach out to these contacts and ask them – what do you they see coming in the next five years?
The suggestion I’m making is that without anticipating risk – not simply understanding risk – but playing a risk scenario out across the same time period that you project your cash flow, you are making an extremely important business decision by understanding only one side of the potential outcome. Remember, whenever you expand, you put your entire company at risk, not just the new venture.
Measure twice, cut once and this is true for your business as well. Keep your cash flow flowing and your rose colored glasses in the drawer when you’re planning your company’s future. Maintain a broad set of options and examine them across a continuum that has great success on one end and abject failure on the other. Your answer will be found somewhere in between.