Frank, is the founder and owner of WidgetsRUs which is 20 years old and in perpetual growth mode. Frank is a typical entrepreneur; optimistic and full of ideas. To finance growth, Widgets needs cash; lots of it.
Before the last recession, Frank had a great relationship with his bank. Each year, the bank increased the amount on his secured line of credit (LOC). Frank frequently accessed his LOC, but never borrowed the maximum; leaving funds for a “rainy day.” The bank’s interest was secured by his inventory and accounts receivable. Widget’s secured assets grew as he did and the bank assessed him as a good risk.
During one period, Frank almost ran out of cash. He purchased a few new heavy trucks to replace a couple of old ones that could no longer be repaired. He needed cash fast and had enough available on his line. He reasoned, “It’s not that much money and without these trucks, I will have an emergency. That’s why I have this line.” For the first time, Frank borrowed the maximum amount on his LOC.
The next year, Frank’s new sales staff sold a large account. Frank needed more cash to fund his new customer’s implementation. The bank refused to increase availability on his LOC, but did offer to refinance the purchase price of trucks into long term debt with periodic payments over 5 years. “Great deal,” he thought, “Now, I can stop worrying about cash.”
Frank continued to set company sales records and request more debt from his loyal bank. Frank’s loan officer explained that the bank’s new owner is more conservative and wants extra security: a personal guarantee of the debt. Frank rationalizes that his new “hunter” sales person is so close to a few big sales and his risk of losing his house isn’t that significant.
Occasionally, the hunter did make some large sales. Instead of reducing his debt, Frank kept the cash to finance his latest idea. Somehow, there was always enough cash to meet the company’s immediate needs. Frank became numb to cash flow worries.
One bright Monday morning, Frank arrived at his usual 7:00 A.M. upbeat and excited about the upcoming week. At 8:00 A.M., his Controller asked for an emergency meeting. Widgets’ biggest customer had announced that they filed Chapter 11 and the check that they had promised this week would not be sent. In fact, the customer didn’t think they could release any cash for at least 90 days. “And, we have borrowed our maximum on the LOC. Payroll is this week and we are $500,000 short!”
Frank is stunned and terrified. “How did this happen overnight?!”I refer to Frank as the proverbial, dead frog, who is boiled by sitting in a pot of water where the temperature gradually increases. Since the slow temperature increase was not immediately obvious to the poor frog, he chose to ignore gradual, but obvious, signs of a problem until it was too late for him to save himself.
Because our brains will overload if we try to absorb all available information thrown at it, we develop filters to sort and prioritize it. In other words, our thinking is limited by self-imposed filters that create boundaries to the information that we absorb. There are many models to explain this phenomenon (see the end of this blog for reading recommendations).
The point that I make today is that the gradual exposure to a risk sometimes makes us dangerously numb to it, and that focusing on one thing can come at the cost of completely missing another important one. In Frank’s case, he focused on revenue growth. His luck with last-minute cash “management”, made him gradually go blind to the fact that he had no cash availability. In addition, his denial was deeply unconscious, which explains why he was so shocked when the inevitable happened.
Most of us are blissfully unaware of our blindness. Like Frank, we fail to recognize that our mental filters seriously affect our decision making.
Your strongest filters are created by your personality. The Enneagram is a map of the ego and you can learn more about your own blind spots: unconscious thinking and emotional filters. By dedicating time to quiet your mind and reflect, you can become aware, over time, of your habitual responses, “unfreeze” your old filters and broaden your perspective.
Since different people have different filters, asking for multiple views will yield more relevant data necessary for a more informed decision.
Create a group of trusted advisors. To bypass industry and company group-think, select them from the outside and from different industries. This is the model that Vistage uses and I have seen feedback from outsiders dramatically change my members’ businesses and lives. “Frank” was a member of one of my groups. Because his group periodically reviewed his financial statements, they quickly recognized when his financial situation became more risky and recommended effective interventions.
The human mind is amazing. Many of its functions operate automatically, outside our awareness. However, our automatic unconscious decisions, especially incremental ones, can lead to unacceptable results. Take some time to reflect on your company. What areas of your company have gradually changed? Ask others to identify your own blind spots before something unpleasant hits you on the head!