Focus On Business Radio Podcast: Zombie Companies: Dead Businesses Walking!
Beware The Zombie Business Apocalypse
What are Zombie Companies?
The walking dead are zombies. Zombie companies are businesses that require recurring bailouts to stay in business. These firms cannot repay their debt. They are companies that are dead when you look at the fundamentals and long-term viability of their business models.
The zombie transformation of many industries began, at least in part, when companies shifted more of their focus to managing their stock price. Companies decided to deploy their cash to repurchase their stock rather than on building stock value through growing sustainable, thriving businesses that deliver products and services, innovate business models, and develop technology that customers need.
Arbor Data Science released research on the top five sectors comprised of zombie companies. These industries account for nearly one million jobs that could vanish permanently.
Hotels, Restaurants, and Leisure: 153,000
Energy Equipment and Services: 185,000
Hardware, Storage, and Peripherals: 193,000
Industrial Conglomerates: 233,000
Dying to Grow – Debt Timing of Funds or Only Source
Corporate debt has become the de facto source of growth. As companies seek to become larger and larger chasing the economies of scale advantage and market share crown, they rarely seem to stop to calculate a healthy, sustainable, internally-funded growth rate. Several decades ago, I worked for a company that was chasing the brass ring of being the biggest in their industry. I repeatedly asked, “Wouldn’t it be better to be number three in sales and number one in profitability?”
Using Our Heads – Rethinking Growth
Bigger isn’t always better. Rapid, high growth achievable through massive debt is rarely sustainable. Sound business principles and a focus on the customer provides life-long growth that weathers the storms – natural and economic.
Customer-focused, productive, innovative businesses – large and small – with the potential to achieve significant growth that requires short to mid-term borrowing to change the timing of cash flows not to replace customer revenues may die an early death, because of a lack of access to capital.
Free Markets and Capital Access Allocation
In a truly free market system, the zombies would be dead and buried. Companies that need life support to get through pandemics and natural disasters who have robust businesses and sound business practices would have access to capital.
Also, resources deployed to keep the zombies walking could be allocated to retrain workers formerly employed by the zombies.
The pandemic has made it evident that cheap money has covered a lack of business fundamentals. Zombie companies are everywhere. We do business with them every day. Unfortunately, there is no silver bullet, and even if there were, it wouldn’t solve the zombie business problem.
Don’t Become a Zombie
Fortunately, businesses on life support and innovative companies don’t have to die or become zombies. It may surprise you, but now is a great time to stop the zombification of your business. Yes, money is tight and, to some companies, nearly non-existent. Access to capital will not improve for the near-term (six to nine months at least).
What to Do Now
Business CPR includes preserving cash, focusing on profitability, and revenues. Why in that order? Without cash, you can’t pay your bills. If you can’t pay your bills, then you are bankrupt. Profitability is crucial because it doesn‘t matter what your top-line revenue number is if it doesn’t pay the bills and provide funds to grow. Remember, zombies are sustained by OPM (other people’s money). You need to build using your operational cash flow that will support limited access to capital that enables you to change the timing of cash into your business.
Fundamental Rule of Business
Debt is meant to change when cash flows into the business. Debt is not intended to replace cash flows from profitable sales from customers. You get funds from lenders to spend now and repay later with funds from operations.
Capital from government programs (Paycheck Protection Program (PPP), Economic Injury Disaster Loan Emergency Assistance (EIDL), other grants, and SBA loans) are not sustainable funding sources. They are stopgap measures to bridge your business across the chasm created by the reaction to the global COVID-19 pandemic. While these funds are likely to be the difference between life and death for businesses in the short-term, they are not the solution to the underlying issues the crisis has revealed in companies large and small.
COVID relief funds have bought many businesses time to rethink how they operate. The focus has been on changes in delivery methods, where employees work, and other logistical and technical aspects of day-to-day operations. But what about the long-term?
The goal of every business is customer sales. Every company must focus on generating profitable customer sales that generate positive cash flows. The profits and positive cash flow are the substance of sustainable business growth and maintenance of existing capability, including capacity.
The “C” of CPR – Capital Conservation
Most discussions about PPP loans center on achieving forgiveness, not about the strategy for deploying the funds for approved uses that may not be forgiven. If your business had to reduce headcount or layoff your entire team and you’re focused on maximizing loan forgiveness, you may be making decisions using the wrong criteria.
While getting the funding gives you options, those options are limited to a specific timeframe. They are also established to incentivize you to retain your employees. However, it may not be your best option if you are not generating sales, profits, or cash.
Business at all times is about taking short-term action to move you toward your long-term goal. Short-term actions taken through the lens of government program requirements may lead you to decisions that cost you in the long-term.
Save the Ship, Save the Crew
If you ever watched Star Trek The Next Generation, you may have seen an episode (Thine Own Self) about Counselor Troi is pursuing bridge officer status. She has to pass a simulation test focused on her decision-making skills when she must save a severely damage Enterprise without putting anyone at risk. Her command test provides us with an insight into leadership with a focus on preserving the ship (our businesses) and, ultimately, the crew (our team).
Sometimes we can’t save everyone’s jobs. The effort and decisions made to keep everyone can lead to massive, critical failure. Failure that may mean no one has a job because the business has no choice but to close. On the other hand, a decision made preserve capability may enable us to reduce the workforce for the short-term and grow in the long-term.
Profits with a Capital “P”
Profitability is the line between success and failure. I don’t ask start-ups when they are going to get to breakeven. I ask them when they will make their first dollar of revenue. What’s the difference? Focus. The goal of business is profit from day one. What we want to celebrate is the first dollar of profit! Tradition has us focused on covering our costs when we have the breakeven discussion – revenues equal expenses. Yeah! It is a milestone, but it isn’t the goal.
Revenue Optimization – Get and Retain Profitable Customers
Too often, we look at all sales as being equal. Several years ago, I worked with a client that spent as much effort pursuing a $10,000 sale as they did a $1,000,000 deal. They were fortunate to have multiple opportunities to go after $1 million transactions each month. Unfortunately, they couldn’t pursue all the possibilities, because they spent so much time going after the small sales.
Every business needs to analyze and segment their sales efforts based on several factors:
- Dollar value
- Profit margins, gross and net
- Time and effort (hours and dollars) invested in generating a proposal or pursuing the deal
- Life-long value of the customer (revenue and profits)
- Creditworthiness, time to collect payment
- Capacity of the sales team, quote system, and other resources and tools
Every sale may be crucial when you haven’t had revenue coming in for several months. Initially, during your restart phase, you may have the capacity and the need to go after every opportunity. However, you do need to monitor your business to know the point where your prospects need to make resource allocation decisions to the most significant return.
Thriving and Vital, Life Support, or Zombie
As the economic engine revs up, your business needs to maximize the impact of every action you take. Your team needs to be laser-focused on generating quality sales that include a profit and actual payment for your goods and services. Your business may need to review and revise your credit terms, provide incentives for cash payment, include fees for shipping and credit card processing as line items separate from the product and service costs.
Your business may currently be on life support. You need to be strategic in how you do business and with whom you do business. Think about these actions:
- Talk to your existing customers to verify their current capability to pay;
- Verify prospect and new customers creditworthiness or place them on a cash basis or cash on delivery status; and
- Consider breaking down large deals into a series of multiple smaller deliveries with payments upon delivery of each quantity (identify economic order quantities that work for you and your customer that place this strategy can reduce the upfront investment and risk for you and your customers).
Beware the zombies and the business practices that could lead to your joining their ranks.
Copyright ©2020 Lea A. Strickland, MBA MA CMA CFM CBM GMC