Snowman's debt
Mankind has been building snowmen since the medieval times, yet last time we checked it did not cost us money (if we eliminate the value of time, of course!) to build one so long as you have plenty of snow in your backyard. Although the global warming may soon force us to revisit the above statement, it is still hard to imagine anyone paying for snow let alone borrowing money to do so. How is debt then related to snowmen, you might ask? Good question! Let's see...
Ok a little confession is in order! You are right; a snowman has literally nothing to do with debt (if you disagree, you might want to contact us immediately!). However, snowmen provide a very nice analogy to understanding how companies can proactively and efficiently manage their funding requirements.
It is true that over the past few decades, access to capital (especially so for small and middle-market companies in their growth cycle) has vacillated due to the shifting nature of the liquidity and tightness of the credit markets. The availability of credit has been further constrained in this global post-crisis era that we live in. Today, the trick is to gain access to capital - ensuring better terms is a privilege. This applies to both debt and equity regardless of its source.
What an optimistic start to this article, right? Fortunately, this does not apply to all companies, at least to those companies which know and act upon the secret of the snowman. Snowman again? Yes, sorry! You see, a typical snowman has three snowballs of different sizes. Now, if we assume that the snowman itself is a collection of various financial and operational metrics and that each snowball represents a different level for those metrics, we can overall visualise this as a three level progression ladder, whereby the lowest snowball represents those firms and organisations with the lowest creditworthiness, the middle snowball being the average, and the top snowball comprising the best-performing companies in a given sector or industry. Although the snowballs themselves remain fixed (i.e. the metrics are relatively constant), any given company can obviously move up or down the snowball at any period of time - depending on its performance. Let us also further visualise an imaginary horizontal line representing the current liquidity and tightness of the credit markets in a given economic and political environment. This line, too, will obviously tend to shift up or down with time. In periods of economic boom, the line will be quite low (somewhere crossing the mid-high point of the lowest snowball), and conversely during an economic crisis and depression, the line should be very high, possibly even reaching a level around the snowman's eyes. Why does this all matter? Well, depending on which snowball your company occupies at any given period of time relative to the horizontal line, will determine if financing options are accessible to you or not. A company's position/performance above the line is good news and vice versa.
Unfortunately, too many companies fail to grasp the message that our snowman is trying to pass. They often blame their inability to access capital on the market conditions - i.e. the period of time when the horizontal line is high. Yet, what the snowman shows us is that if you want to be in a position to be able to access financing whenever your needs dictate, position yourself in the mid - or better still, the top snowball. If you do this consistently, then the funding options will find you, or at the least be easily accessible, regardless of the prevailing market conditions.
Hence, the question becomes how can you, as the management, position your company to consistently remain in the mid or top snowball over the years? This is certainly no easy task, but we strongly believe that by deliberately planning for funding right from the outset and explicitly making it a large part of your overall growth strategy is one sure way of significantly increasing your chances of getting to and staying in the mid-top snowball. Of course, there should be an optimal balance between planning and doing, as planning alone (no matter how good) will not provide the results you seek. At the same time, in order to do something meaningful one needs to plan for it accordingly. Doing things alone do not yield effective results, but doing them in the right order and at the right time can!
It should, therefore, become clear that strategic planning at the highest level is the single most important element, which leads the entire funding process. Get this right, and everything else should flow smoothly thereafter. As the management of the company, before you start doing things, you need to clearly understand where you are, where you want to go, and how are you going to get there. You need to plan for this well before you need funding, always staying a few steps ahead of your needs! Do this consistently and align this process with your stakeholders across the organisation, and you should be able to stay at or above the middle snowball. And when that horizontal line starts shifting up, let your competition wonder at how you achieved that gold medal status at a time of doom and gloom...
Check out our upcoming article where we will be discussing this planning and alignment process in more detail. Share it with your friends and keep it away from your competition!
