One of the slogans I very much believe in says – “When you have enough cash nothing is important, when you do not have enough cash nothing else is important“. In the constant chase for growth and profits, it seems that cash situation does not receive the respect it deserves. At least not before the cash situation becomes painful.
It seems to me that the focus management is allocating for cost reduction should be shifted to cash protection. The effect of achievements with cash is by far greater than the effects of cost savings. Especially when cost savings are not real cost savings (please look at your own experience, how many times have you witnessed a successful cost reduction program but could not find the savings in the company’s financials? Isn’t that a clue to consider?). Management attention is a scarce resource and we need to use it well. I would suggest the following priorities:
- Growth – As opposed to cost savings, growth is infinite, don’t waste your time seeking to achieve limited benefits, rather focus on what can deliver infinite benefits.
- Cash – Ensure that at all times, the available cash you have is sufficient to sustain the full operations of your company, for a long enough predetermined period, giving you the comfort and safety you can continue running your business even in extreme unpredictable external circumstances (I believe Nassim Taleb in his book Black swan refers to this condition as “Antifragile”).
Some may think that cost should be on that list as well, however let me try to offer an alternative. If you identify your key performance indicator, as valued by your market, and understand that growth comes from continuously improving on that, you will realize that cost gets optimized as a result, and not as a target. Taichi Ohno in his book “The Toyota Production System”, wrote -” All we are doing is looking at the time that passes from the moment a customer placed an order to the time we collect the money for delivering that order, and focus on reducing it“. By continuously reducing lead-time, cost goes down as well (and when lead-time is zero cost will be zero as well). Toyota is by far the lowest cost per unit producer in the car industry, without measuring this measure or trying to improve on it. It is a result. (Funny is that the effort to reduce cost per unit, mostly ends up with cost per unit being increased).
Focus on growth – find the most important performance index that is of meaningful value to your market, implement a continuous improvement program for ensuring the improvement on that particular measure never stops and align your marketing and sales with that.
Then focus on cash – It is your most valuable asset in the journey. Build and sustain sufficient cash buffer, have cash protecting procedures and decision rules in place making sure your growth ability is kept at all times.
This is the best use of your most scarce resource – management attention.