21 Nov Unwinding
A business can be like a train sometimes – it takes a long time to wind up, and can be hard to slow down and unwind if you need to.
Topic – 5 big mistakes made in a recession
Mentor – Jacob Aldridge
- Don’t get caught by surprise
- The peril of responding too late
- What the best businesses do
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Kevin: We are talking this week about recessions or preparing for the possibility. There may be a downturn in the economy. It might not be happening for you right now, but the lesson we’re learning in the discussion this week with our mentor, Jacob Aldridge, is that you need to prepare.
Kevin: One interesting thing, Jacob, is that if a business is going really, really well in the good times, it’s probably going a million miles an hour, it takes a long time to wind it up, but it also takes a long time to slow it down, doesn’t it?
Jacob: It does. Absolutely. And like we talked about on Monday, a lot of licensees, realtors, are caught by surprise when the market turns, especially if it’s more localised to their city, as opposed to something that’s covered in the national media, and so they’re not ready. They don’t have a plan to wind back their business, to respond, and if they respond too late, they’re going to go broke.
Kevin: Is it a good exercise to have your business ready for that and you’ve got it so finely tuned that there’s really not a lot of waste in the …? ‘Cause in the good times you actually build up a waste, don’t you, in your business?
Jacob: You do, which is kind of the opposite risk that in good times you can not be concerned about the little things and build up all of that fat, so you do need good financial habits no matter where in the market cycle you are.
Jacob: The great real estate businesses that I see are catching up with their accountants on at least a quarterly basis. They’ve got monthly financial reports that they understand so that they can be keeping an eye on that fat so that they’re not building it up, and if something were to happen, if they dramatically had to drop their expenses by 20% or 50%, they’d have a good idea of exactly where they’d be able to do that in a hurry.
Kevin: Can you cut back too much?
Jacob: You can. You certainly don’t want to, as I think we talked about yesterday, stop investing in the business. But the biggest mistake I see in a recession or a downturn is businesses that don’t cut back enough. They kind of cut back their expenses to a break even point so that they’re covering costs, but that means they don’t have any spare cash, they don’t have any working capital, and so they actually can’t invest in opportunities.
Jacob: You think about it. You’ve got a great sales person or maybe there’s a rent roll or a competitor business that you could buy in a recession because it’s going cheap, you’ve got to have the cash available to do that, and so you’ve got to sometimes cut back deeper than you’d like in order to free up the cash to really make the most of a recession.
Kevin: Yeah, because in the good times you can actually run your business lean so you can take those strategic opportunities, which is really what you’re saying, Jacob.
Jacob: Cash is king. And where you’ve got cash and profit in the business, always be thinking about how can I reinvest this in my business, instead of just assuming that you have to take that out as profit, put it in your pocket and turn it into a jet ski or Ski-Doo.
Kevin: Yeah, there’s a difference, a huge difference, and it’s easy to justify those things in the good times, too.
Kevin: Jacob Aldridge is our guest and as I said yesterday, he’s the editor, the brains behind Real Reach, a great programme. Check it out for yourself. If you’re an aspiring leader and you want to know what’s involved, it’s all in there for you, some great material. And even if you are a leader already, you want to improve your skills, that’s the place to go. It’s called Real Reach and you get all the details at RE Uncut.
Kevin: Jacob, back again tomorrow morning. We’ll talk to you then about micro and macro, mate. Talk then.
Jacob: See you then.