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It’s easy to imagine boom times will last forever. Restraint is never easy when everyone else seems to be putting two feet on the gas pedal. We’ve seen the consequences of that mindset this week as Fortescue Metals Group, a beneficiary of of Australia’s commodity boom, has had to scale back massive expansion plans as the price of iron ore falls.
The result has been an investor and public relations disaster.
The Harvard Business Review points to Allen Printing, a company that grew rapidly in the run up to the financial crisis, then ended up bankrupt as cash dried up.
Sandeep Dahiya offers three rules for preventing such crises:
First, understand your true operating costs and how they evolve as your business grows. Rapid growth frequently put margins under pressure as the company tries to keep customers happy with such services as faster fulfillment and generous payment terms.
Second, get a solid grasp of your working capital needs–how much cash does your firm require to conduct day-to-day business?
Third, avoid the widespread obsession with income statements as an index of health.
Whether it’s easing payment terms or investing in a massive new mine, it’s much easier to take the leap than claw your way back, especially when conditions deteriorate.
Not every company can be prescient about the next financial crisis or predict the end of a commodities boom years ahead. However, every business can make sure they’re ready for things to go badly as they have well.
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