Former heavyweight champ Mike Tyson famously said, “everyone has a plan until they get punched in the mouth.”
Had a chance to meet Iron Mike a few years back.
Entrepreneurs are among the best at planning, but never has any business plan gone exactly according to a script. In fact, many businesses start out with a mission to solve one problem and end up focusing on something entirely different because the economy changed or the initial plan of attack simply wasn’t feasible.
Some entrepreneurial plans fail because they didn’t establish proper risk mitigation strategies or contingencies for the inevitable slow periods. As a result, when things go off the rails, many entrepreneurs never recover – be it from the stress, financial challenges or an inability to adapt and innovate. Nowhere is this example more prevalent than in the commodity industry – the king sector for booms and busts; and an industry in which I’ve helped dozens of companies rebrand and improve their overall business development strategy…
Case in point: In 2011, gold companies were being bought out left and right. Money was flowing freely with stock prices minting millionaires every month. The price of the shiny yellow metal was rising to historic levels (nearly $2,000 an ounce), and the masses thought it would keep climbing because the US dollar was in free fall and America was in danger of default thanks to gridlock in Congress. The winds were in gold miners’ sails so to speak, and expenses and exploration budgets, along with valuations, were at all-time highs. But then the industry got the inevitable ‘punch in the mouth.’ The US dollar rallied; deflation became a serious concern, and cost of production across the industry began to rise. In short order the market discovered just how levered the entire industry had become during the boom years, and the downward pressure on gold miners’ stock prices continued for an unprecedented four years as a result. No one was ready for this. And bankruptcies in the gold sector were rampant. Gold stock investors, in many cases, lost 90% from peak to trough; and liquidity vanished. Gold’s price also collapsed nearly 50%. The industry had no plan for that punch in the mouth…
6 Ways to Prepare Your Business for the Worst-Case Scenario
Save: This is the most basic of principles, yet these days, with negative interest rates and out of control materialism, so few entrepreneurs (and households for that matter) save for a rainy-day. One of my companies literally has a ‘rainy-day account’ in which we put 10% of all profits. During the ’08 financial crisis, we had to dip into it. Since then, thankfully, we have not, and it now sits at a sizeable balance, which could allow for an opportune acquisition if we see another market meltdown in the years ahead. Rainy-day funds keep you on track, allow you to sleep at night and most importantly, they keep you liquid when others aren’t. This creates opportunity.
Create a new offering every 6 months, no matter how good things are… When entrepreneurs develop a killer product that sells like hot cakes, they often ride that puppy as long as possible. It becomes their bread and butter. Such a narrow focus is dangerous. This type of product success can make you complacent as an entrepreneur – even reluctant to provide new offerings.
Every 6 months you should be working on a new offering capable of being a company maker, no matter how successful current offerings are selling. Expect the market to change tomorrow; what’s hot today may not be tomorrow. This is a great mindset for entrepreneurs to have as it encourages diverse offerings – inevitably making a company better prepared in a changing market environment.
Realize that all businesses are cyclical. Record years are called ‘records’ for a reason. No matter if you’re in fashion, finance or fossil fuel production, everything is cyclical. Remember this in both the good and bad times - and act accordingly.
Avoid credit unless…
With historically low interest rates, leverage is out of control these days; and excessive use of it during the boom times has been the downfall for many companies in the bad times. Just look at the oil sector. A shale producer is going broke every week now.
Respect credit… unless utilizing it gives you a measurable ROI, returning at least 25-30% more per annum than it costs to service, avoid it.
And if your business needs credit to stay afloat, it’s not a real business.
Establish emergency credit for the bad times. Like the ‘rainy-day account’ mentioned above, a credit line for your business serves as a good resource if things get tight. This is for emergencies only…
Know your margins down to a tenth of a percent. In tough times, lowering prices may be necessary. Intimately understanding how much wiggle room you have is critical. This is one reason why I always stress establishing high-margin businesses and product offerings. Not only do they pad your pocket in the boom times, they give you more flexibility in the bad times. It’s always the tight margin businesses that suffer most, and often collapse, in recessions.
Preparing for the worst-case scenario is rarely addressed in entrepreneurial materials, but it’s so important. The most successful entrepreneurs are those with the highest level of perseverance and ability to overcome challenges such as recessions and industry down cycles. These tips will help you prepare for the worst without missing a beat during the best of times. As entrepreneurs, we need to be prepared for anything and quickly adapt to what we are given. Use these six tips to prepare for a worst-case scenario with your business.
Stay hungry,
Aaron
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