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The Good Times

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19 / Oct / 2011

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For smart people, the good times are the bad times.

You would think we have been through enough business cycles for people to learn some basic principles of financial management.

Good times create opportunities to prepare for bad times.

That is so simple and yet this simple principle is more often observed in its breach.

There are businesses and governments that get carried away in the euphoria of good times and spend money as though business cycles do not exist.

What is worse is that they spend other people’s money in the way of borrowings.

Expenditure that improves the competitive position of an organisation is an investment in the future and is generally related to creating efficiencies or undertaking R&D to achieve cost leadership or an innovative competitive advantage.

Businesses that stay focused on these critical aspects of success also understand the importance of a strong balance sheet and avoid stupid expenditure such as acquiring aircraft for personal use or leasing the latest Mercedes Benz which contributes nothing to the competitive position of the business.

When the bad times come, the organisations that have been frugal and have only invested in improving their competitive position while putting something away for a rainy day have enormous advantages. .

The irony of all this is that good times are the times to save money and bad times are the times to take advantage of that frugality and spend money.

The success of any organisation is dependent upon achieving a competitive advantage and the ability to do that is eroded by flippant financial management in the good times.

Downturns in the business cycles extend great opportunities to the organizations that have handled the good times prudently.

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