Summary

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.

Beware The Zombie Business Apocalypse

What are Zombie Companies?

Zombification

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.

Zombie Industries

Arbor Data Science released research on the top five sectors of zombie companies. These industries account for nearly one million jobs that could vanish permanently.

Software: 142,000

Hotels, Restaurants, and Leisure: 153,000

Energy Equipment and Services: 185,000

Hardware, Storage, and Peripherals: 193,000

Industrial Conglomerates: 233,000

Zombies 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 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 chasing the brass ring of being the biggest in its 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 provide lifelong growth that weathers natural and economic storms.

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 rather than replacing 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, and 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 shown that cheap money has covered a lack of business fundamentals. Zombie companies are everywhere, and we do business with them every day. Unfortunately, there is no silver bullet; 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 your business’s zombification. Yes, money is tight and, to some companies, nearly non-existent. Access to capital will not improve for the near term (at least six to nine months).

What to Do Now

Business CPR includes preserving cash, focusing on profitability, and generating revenue. Why in that order? Without money, 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, enabling 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. You get funds from lenders to spend now and repay later with funds from operations.

Business CPR: Cash, Profit, and Revenue

Capital from government programs (Paycheck Protection Program (PPP), Economic Injury Disaster Loan Emergency Assistance (EIDL), other grants, and SBA loans) is not a sustainable funding source. 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-19 relief funds have given many businesses time to rethink their operations. 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?

Every business’s goal is customer sales. Every company must focus on generating profitable customer sales and positive cash flows. Profits and positive cash flows are the basis of sustainable business growth and the maintenance of existing capability, including capacity.

The “C” of CPR: Capital Conservation

Most discussions about PPP loans center on achieving forgiveness, not the strategy for deploying the funds for approved uses that may not be forgiven. If your business had to reduce headcount or lay off your entire team, and you’re focused on maximizing loan forgiveness, you may make 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 is always about taking short-term action to move toward your long-term goal. Short-term actions taken through the lens of government program requirements may lead 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 pursuing bridge officer status. She has to pass a simulation test focused on her decision-making skills when she must save a severely damaged Enterprise without putting anyone at risk. Her command test provides us insight into leadership, focusing 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 to 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 profit. 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 equal. Several years ago, I worked with a client who 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 pursue $1 million monthly transactions. 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 its 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 revenue has not come in for several months. Initially, during your restart phase, you may have the capacity and the need to pursue every opportunity. However, you need to monitor your business to know where your prospects need to allocate resources for the most significant return.

Thriving and Vital, Life Support, or Zombie

So, as the economic engine revs up, your business needs to maximize the impact of every action you take. The team needs to be laser-focused on generating quality sales, including profit and actual payment for your goods and services. Your business may need to review and revise your credit terms, provide cash payment incentives, and include shipping and credit card processing fees 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 and with whom you do business. Think about these actions:

Talk to your existing customers to verify their current capability to pay.
Verify the prospect and new customers’ creditworthiness or place them on a cash basis or cash on delivery status; and
Consider breaking down large deals into multiple smaller deliveries with payments upon delivery of each quantity (identify economic order quantities that work for you and your customer, and placing this strategy can reduce the upfront investment and risk for you and your customers).

Ultimately, the best advice for every business is to be proactive and lead the change your business needs to implement. Businesses survive and thrive because they connect with the customer and provide value. Focus on the fundamentals of your business, serve the customer, and you won’t have to worry about becoming a zombie business.

Beware the zombies and the business practices that could lead to your joining their ranks.

Are You Doing Business with Zombies?