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CASH IS EMPEROR!

By Jack Osborne

In the early '80’s I was a mid-level manager at Memorex.  Neither the company, nor its Santa Clara campus exists today, but some of what I learned there remains with me still. 

The CEO was a gentleman named Robert C. Wilson.  At that time he was the highest paid executive of a public company in “Silicon Valley.”  At a base salary of ~$2 million a year in 1980, we figured he wasn’t hurting.  He believed he earned every penny. 

He was the most formal man I ever met.  You never – ever – called him Robert or (heaven help you!) Bob.  He was “Mr. Wilson,” even to his most trusted staff.  He called me “Mr. Osborne,” and I listened, and learned.

Mr. Wilson liked to say that the three most important things in running a company were (in order) Attitude, Cash, and Profit.  Cash was what worried him the most, but as he said, “If you’ve got the attitude, you can get the cash!”   His most repeated saying was, “Cash is King!” – not particularly original, but salient nonetheless.  Considering that what Memorex needed most in those days was cash, it is easy to understand his preoccupation.  “Cash is like oxygen,” he also said, “whereas Revenue is like water, and Profit is like food.  You can live a long time without food, less long without water, but not long at all without oxygen!  Cash has to be your preoccupation in running a business!”

Fast forward to today.  We live, and conduct business, in uncertain and seriously challenging times.   If you are managing a business, every day is fraught with potential disaster.  If you are an investor in a business, you face challenging exit (liquidity) strategies at sub-optimum valuations.  Nothing is ever easy, but nowadays “difficult” seems to be the norm.  And the largest issue most businesses, and investors, face today is still the same as in Mr. Wilson’s time – the availability of cash.  In fact, today’s financial environment is so constricted that to simply say, “Cash is King” doesn’t adequately describe it.  Today, “Cash is Emperor!”  Cash is everything, and it is the key to survival in difficult times. 

If you manage a developing business that has not yet reached the milestone of generating positive cash, then you are living on “other people’s money.”  Chances are, you will need more of it over the next couple of years – the minimum time for this “difficult” financial period to “run its course.”  You have two choices, neither of which is easy.  First you can try to borrow more – finance by debt.  In the past, if your balance sheet looked attractive and if your growth tracked to plan, you might have been able to pull this off.  But today it is not likely you can borrow, under any terms.  The second approach is what has enabled you to get where you are – sell more of the company.  But investors no longer are throwing bundles of cash at companies that can’t yet control their own destiny.  Even if you are able to secure additional funding, the cost to do so has become far more expensive; valuations are much lower now and thus, dilution for you is more severe.

If you are an investor who owns a piece of a company like the one above, it is no easier.  Your model is to put a little money in, and get a lot back, as quickly as possible.  Not only are those companies in which you have ownership requiring additional cash (investment) from you – perhaps more than you planned – but also your paths to liquidity (the “getting it back” part) are severely constricted now, and for the foreseeable future.  You’re also in somewhat of a pickle.

So what’s the answer?  Will developing companies pull up tent stakes, and will investors throw in the towel?  Maybe in some cases, but those companies may not make it anyway.  Darwin proved the weak inevitably will fall by the wayside.  But other companies will find ways, and deals will get made.  And investors will look to other paths for liquidity besides relying on IPO’s; selling the company, for instance, or merging it into another company that is public.  It’s not that deals won’t happen, it’s that the competition for deals is more intense.  As in everything, scarcity leads to intense competition for what is needed. 

And when times are difficult, the most prepared, the most efficient, and the most impressive companies in using cash and meeting their plan not only survive, but also prosper.  The best-looking ones always “go to the dance,” and have the best chance of making a meaningful “connection.”  That’s just the way the world works.

The actions required now, for those who want to go to the dance, all revolve around cash – generate as much as you can and then preserve all that you have.   The “generating” part comes from operating efficiently.  Any business, in its most fundamental analysis, is a machine to generate cash.  Today, circumstances dictate that you cannot have your cash lazily stuck in inventories or materials (“high turns”), in uncollected billings  (“DSO’s”), or in a myriad of other places where it may reside in equivalent forms.  The demand now is to “turn the crank” on this cash generating machine so that cash doesn’t stay in non-cash mode any longer than necessary.  This requires constant, active, and focused management.

The “preserving” part truly is the challenge though.  This is what brings the most pain and demands the most ice water in the veins of today’s executives.  This part requires the toughest decisions.  Those decisions often involve saying “no” when everybody around you (including your innermost desires) say “yes.”   Those decisions often demand that every single person on the payroll be evaluated for their criticality to the company at this time, and for their productivity.   The fact that John or Mary may be “nice” people no longer is important.  If they are not absolutely critical to the focused business plan, then they must be released.  The question is not one of conscience, or of avoiding pain.  This is not the Marines, where no men are left behind.  This is the cold cruel Darwinian world and survival is the most important consideration!  If someone isn’t truly, absolutely needed now, then they must be trimmed away.  Brutal you say?  Yes, but necessary.  Better to survive and have a chance to make amends in the future, than to avoid pain but die.  Death (corporate or otherwise) is final.   Not only is it imperative that these “toughest of the tough” decisions are made, but that they are made as quickly as possible.  Procrastination by the executive staff is not acceptable.  Cash must be preserved, because you never know when you will have more, or at what terms, until you have a deal for more.

Yes, these truly are “times that try men’s (and women’s) souls,” but they also are times that determine who make it.  And any companies that make it, will be better staged to more strongly compete in the future.  The best fortune always comes to those who make it to the dance, and learn how to efficiently “glide and stride” for the future. 

        

 

 

 


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