What Any Business Can Learn From the Detroit Bankruptcy

The following 4 points were blogged by July 27, 2013 by Curt Mercadante.  I have taken Curt’s very succinct points and added a few thoughts for my contacts and clients.

1) Just because things are great today, doesn’t mean they’ll be good tomorrow.

Curt stated that cities such as Detroit, and states across the country, were flush when the economy was good — but they spent their money, didn’t plan ahead and now are in some pretty deep fiscal holes.

The streets of American entrepreneurship are littered with companies and startups who did the same thing — experienced success fast, grew too quickly, hit rough times, and hit the skids.

I advise all the organizations I work with in the Chicago area, that they need to build reserves.  The economy and all business go through cycles.  If you don’t store up when times are good you will not be prepared for when times are bad.

2) Don’t spend money on ‘swag’.

According to Curt, Detroit has learned about extraneous spending on such extraneous “swag” the hard way.  To wit: In the midst of the Motor City’s bankruptcy, city officials have approved $285 billion in taxpayer funds to build a new … hockey stadium.  The stadium may look nice, it may make people feel good, but it’s a waste of money.

As John Stossel  points out, Detroit spent $60 million on a New Public Safety Headquarters (and, yet, still has one of the highest murder rates in the country, with an average wait time for police of 58 minutes).

Neither the hockey stadium nor the public safety headquarters was needed, and they aren’t helping Detroit’s bottom line — they’re putting the city in a deeper hole.

Just because you are profitable does not provide the justification to spend extravagantly, even if is for capital improvements.  If you need to purchase new equipment have you run a return on investment analysis?  Many business owners I work with dream to own their own buildings, but I ask if this really is the best use of capital?  Making solid business decisions is critical to long term success.

3) If you’re in too deep, call in some help.

Curt says that Detroit’s politicians have not been able to dig the city out of it’s deep fiscal hole which, to be sure, was created by decades of mismanagement.  Now, the experts (the governor and appointed emergency manager) have taken control and are working to set things straight.

Now, hopefully, your business never gets in a hole as deep as Detroit’s, but we all face challenges that sometimes are beyond our expertise to fit. Seeking outside help — whether from friends, colleagues or even paid consultants — isn’t a sign of weakness; it’s a sign that you’re serious about fixing the problem.

Too often my clients wait until the pain to too much to bear before they call me for help.  I work to bring clients back from the abyss by finding cash, but staying out of trouble in the first place is the better strategy.

4) Cut costs, cut costs, cut costs.

Okay, this last one may seem obvious — and is probably covered by some of the other points on this list.  But it’s still vital.  Detroit has spent its way into the current crisis — promising too much money to its employees, and spending recklessly, while its tax base fled the city.  The city has also learned (although the politicians probably won’t admit it) that raising taxes can make the problem worse.

Your business should learn from this example.  Your tax base (i.e., your clients) won’t always be around and, besides, you can’t just snap your fingers to raise more income like a city can raise taxes.  Cut your overhead. Go lean. Don’t hire too fast. Work from home (or co-share an office).  Do whatever you can to keep those costs low. It’s questionable whether politicians in Detroit, and across the country, will learn anything from the Motor City’s downfall — but you’re smarter than they are, and I know you will apply these simple lessons to your small business.

Curt’s advice here is right on.  If you need help or guidance to navigate any rough waters, myself and my partners at B2B CFO® are here to help