Years ago, I was listening to an interview of well known, investor John C. Bogle, founder of Vanguard. Bogle was asked “what is the greatest mistake you see made by investors and investment advisors?” Bogle’s response (without any hesitation) was the attitude ‘this market is different.’ He went on to explain the fundamentals of sound investment practices are the same in any market. You do not change your investment practices to fit the market. I submit to you there is something in Bogle’s response for all of us in the business world. The business cycle of our economy has been and always will be filled with ups and downs. Highs and lows. Easy money. Tight money. Low inflation. High inflation.
So how does Bogle’s response apply to us in the business world today? There are certain principles that apply in every business cycle. All the time. Without exception. Never fail. What are some you ask?
Guard your cash. This may seem obvious, and it is. Most businesses fail not because they lack customers or sales. They typically fail because they run out of cash. There are many reasons businesses run out of cash, but businesses that do not run out of cash survive the bad times. You could say they “live to fight another day.”
Control your debt. Wise use of debt helps business owners grow their business. Businesses that survive the bad times can service their debt when sales are down as well as when sales are strong. Another obvious statement. It takes a disciplined business owner to know when it is right to use debt to fund the growth of your business.
Protect your margins. Margins can erode in good business cycles and bad business cycles. It is easy to rationalize cutting your margin to get that new customer when times are good. You will rationalize (1) margins can be increased over time (2) your competition will be hurt more from the loss of the customer than you will by gaining the customer at a reduced margin. OR, when sales are getting hard to find, it is easy to rationalize reducing margins to keep customers. Eventually reduced margins require reduced operating costs. It is not easy to increase margins. It is not fun to reduce operating costs.
So, take some advice from a legendary investment advisor and do not get caught in the trap of changing tried and true business practices to meet the demands of a ‘different market.’ Stick to the basics. They always work. In every business cycle.