A Tale of Two Rivers

This is a tale of two rivers.  Recently, I was spending time in a consultation with a few friends who are also consulting cohorts.  Myself, Ryan, and Dan met to discuss the possibility of working together with a client.

And, providentially, we drifted onto the topic of fly fishing.

Dan was sharing with me his love of fly fishing.  When Dan shared his experiences, I remembered a very strange business phenomenon.

So strange, that if you haven’t experienced it, you might not believe it.

But, before we get there, I need to provide you with some background.

Dam Building

The United States Army Corps of Engineers (and perhaps others) have built dams across certain rivers in the USA.  These dams exist to prevent flooding.  Some dams serve for hydroelectric purposes.  Additionally, some may exist to save and distribute irrigation water.  Or, maybe they do all of the above.

In essence, these dams create two rivers:

1. The Upstream Portion: Behind the dam, the river is wild and free-flowing.  And, usually, because of the dam, there is a large lake behind it.
2. The Downstream Portion: This is almost two rivers in itself.  Most of the time, the water is quiet, meandering, and contained – not to mention it’s an altogether different river when large amounts of water are released from the dam.

Tailwater Fishing

Now, bear with me.  I am planning to share a strange business phenomenon with you.  But, before we get there, I need to tell you a bit more.

By definition, tailwater is the downstream part of the river (below) the dam.

And, tailwater fishing is a great thing.  Here’s why: When the dam operator opens the dam, a large volume of cold water enters the downstream part of the river.  And with this release, several things happen:

• Because the water released into the river comes from the deep, dark bottom of the lake behind the dam, the trout come with it.  Why?  Trout in the river love the cold water.
• The increased current and water volume stirs up all kinds of bugs and other food sources in the river.  So, when the dam opens, the fish enjoy a free meal.  It’s a proverbial dinner bell.

You get the picture.  It’s an “all you can eat” feast for the fish.  And, it’s also a great time to cast for trout.  And, for your conscience, me and my friends practice “catch-and-release” fishing.

A Tale of Two Rivers

As mentioned, the portion of the river below the dam is a tale of two rivers.

• When the dam closes, the river is low (and slow).
• When the dam opens, the river is high (and fast).

Now, there are also two types of fishermen (and women).  There are those who walk the banks of the river and wade into it.  And, there are those who float or drift down the river in a boat.

Now, here’s the catch (no pun intended):

• When the dam opens and the river is high, you can fish from a boat.
• When the dam closes and the river gets low, you have to fish from the banks of the river.  Because the water level decreases, there are all kinds of rocks, boulders, and other snags which can prevent a boat from going upstream or upriver.

Now, I’ll explain the strange business phenomenon.

It’s possible to be a growing company AND lose money simultaneously.  You can be cash flow-positive; yet, your P & L might show a loss.  Go figure.

A Tale of Two Companies

Good and Busy

Once upon a time, I took a position in a fast-growing organization.  The company was moving as fast as a runaway train.  To keep up with the growth, the company was constantly hiring.

And, if you hire more people, you need more office space.  Plus, if you have more orders, you’re going to need more warehouse space.  And, so on.

My job was to oversee the organization, get on top of things, and make sense of it all.  And, to help plot more of a steady course.

Here’s the parallel: During this time, the river was high.  The dam was open.  The current was fast, the river was deep, and the feeding was good, so to speak.

Bad and Slow

And then, almost overnight, something happened.  The dam closed.  The orders stopped coming in.

And, guess what happened?  All of the downstream water in the river disappeared.  The river dropped.  And, in doing so, exposed all kinds of boulders, snags, and other elements.  The absence of water left us high and dry.

The Parallel

The High Water

Most leaders and organizations are pushing for revenue growth.  They want to experience an ever-increasing volume of water.  This steady and ever-increasing revenue stream provides a lot of things:

• Cash Inflows (although not necessarily).  A “credit” sale is an increase in revenue.  However, until it’s collected, there is no cash.
• Easy Times.  This revenue and corresponding cash boost can make everything easier.  Cash is usually coming in.  There is plenty of work to keep people busy.  Basically, as the popular song line goes, “It’s summertime and the living is easy.”
• Business Growth.  It becomes second nature to hire, give raises, purchase bigger barns and buildings, spread the wealth, etc.

But, The Low Water

But, there’s another saying: “What goes up, must come down.”  The economy takes a turn.  Consumer confidence takes a hit.  People start holding onto their wallets and purses.  And, orders taper off or stop coming in altogether.

And, when this happens, the current you have become accustomed to riding comes to a halt.  It’s like someone closed the dam.  Then, the water in the river drops.  And, it exposes all kinds of rocks, downed trees, and snags.  And, your boat gets stranded.

The Take-Home Message

There are several things to learn here.  But, here’s the gist.

When the Water is Rising

A lot of growth companies get caught up in riding the wave.  During a period of constant growth, cash flow can be good.  In essence, incoming orders and sales can be happening faster than you can spend the money.

It may seem like you are super profitable if the bank account cash balance is growing all the time.  But, as previously mentioned, a growing cash balance doesn’t mean you are necessarily profitable [Oh, and for the record, the opposite may be true.  You could have no cash and still be profitable].

But, when cash is coming in, it becomes easy to spend it equally as fast.

The river is rising, but so is everything else under the water.  So much so, that there really isn’t much distance (if any) between the water level and the rocks below it.

When the Water Drops

As everyone knows, things go in cycles.  Here’s a trustworthy saying:

“What has been will be again, what has been done will be done again; there is nothing new under the sun.” – Ecclesiastes 1:9

So, you can count on the river dropping at some point.  Then, the question will be: “How much water do you have between the bottom of your boat and the rocks below?”

Staying Afloat

There is a secret to smooth sailing in both high and low water conditions.

And, it mostly has to do with margin.  Gross Margin and Net Margin.

• Gross Margin is the difference between your sales price and cost of sales.
• Net Margin is your Gross Margin less all of your S, G, & A expenses (e.g., Selling, General, and Administrative expenses).  The Net Margin could also be termed EBITDA (Earnings Before Interest Taxes Depreciation and Amortization).

Here are the keys:

• Gross Margin should be as high as possible.  This way, each sale contributes to the proverbial bottom line.
• And, S, G, & A should also be as low as possible.

Helpful Tips

For smooth sailing, Blue Elevator™ recommends the following:

1. Be encouraged to maximize Gross Margin.  Feel free to contact us for more information and insight on this.  God willing, there are certain key metrics that you want to achieve.
2. For every dollar of revenue growth, you don’t need to spend a corresponding dollar somewhere else in the organization.  Be prudent.  Live simply.  Keep your S, G, & A expenses as low as possible.
3. Establish cash reserves.  In keeping with song lyrics, “Into every life, some rain must fall.”  So, save some money for a rainy day (or when the river runs low).

Back to the Story – The Margin Outtake

Remember the organization I mentioned earlier?  The dam closed and we were stranded.  And, by the grace of God, we survived.  But, it was a very tough turn-around.

In essence, we had to do Steps 1, 2, and 3 – in reactive mode.

• We had to address Gross Margin.  Prior to me arriving on the scene, the company had become accustomed to pricing on the margin.  That is, cutting price to get deals.  This is also called “buying business.”  This had to stop.  And a minimum margin threshold was established – some 2o points higher than the historical norm.
• We had to address S, G, & A.  We had to scale things down.  This meant lay-offs, a smaller warehouse and office space, etc.
• And, by the grace of God, we began to slowly but steadily begin to establish cash reserves.

Which River Are You On?

Of the two rivers, which river are you on?  And, are you sailing smoothly?

Actually, here’s a better question: Do you how much water you have between the bottom of your boat and the rocks below?

Back in the day, river boats sailed the Mississippi and Missouri Rivers.  The captains and crews would take frequent readings to avoid running aground.  You should do likewise.

Contact us!  God willing, we’d love to help you plot your course and enjoy your time on the river.