Grumpy Old Man #5: The Song Remains The Same

Bottom Line Up Front: Yet again a great company gets punched down by a combination of poor working capital management and a few adverse events. Manage your risk, people!

Anyway, back to our main event. If we look back to the genesis of the Grumpy Old Man series, I wrote about how you need to focus on managing risk especially when it comes to cash/working capital. In that column we reviewed the demise of Columbia Aircraft Corporation of Bend, Oregon. You can read the full column here, but the gist is:

1. Great company selling awesome planes

2. Hit some hiccups in delivery

3. Kept turning cash into inventory while they cleared the hiccups

4. Freak event sucks up more cash

5. Runs out of cash, goes under, assets get sold for pennies on the dollar

Well, there must be something in the air out in Oregon because yet another amazing Oregon-based airplane company has wandered into bankruptcy court.

Van's Aircraft company is one of the clear leaders, if not the runaway leader, in kit airplanes. They design amazing flying machines, sell kits and you build them yourself. The airplanes go fast (pilots love that), there is a very active builder community, and as both a pilot and global brand leader I think they have built an amazing brand.

So, what happened? You can read some of the details for yourself in their bankruptcy filings, but the summary version is almost exactly what happened in the case of Columbia.

1. They grew a lot during the pandemic. While some of you were renovating your bathrooms or perfecting your sourdough recipe, some people decided to build airplanes.

2. They had some growing pains and staff turnover during this time so made some adjustments to their production processes. This led to one actual significant quality control issue and one perceived quality control issue that may not have been real but took hold in their active builder community before they could get on top of it.

3. So, they had to remake a bunch of parts and delay deliveries. Turns cash into inventory, delays cash in the door.

4. They ran out of cash and have now filed for Chapter 11.

Sound familiar? In this case, poor strategic risk management choices made their situation worse.

1. The company ran debt free and had done so for years. Sounds safe, right? They used customer deposits to cover their working capital needs for production and the products were profitable so it all worked out. Until it didn't. They very likely could have gotten some growth debt capital or line of credit earlier in their growth cycle to help them manage through unknown events but by the time they were in trouble it was too late. There is a strategic value to having a "Fortress Balance Sheet."

2. They didn't keep up with pricing through some of the supply chain bubbles and inflation so lost profitability on their core products. This made their cash flow problem worse. Given their market leader position they had good pricing power and an interesting strategic choice would have been to throttle their growth by raising prices. Yes, you may not "maximize" profitability but you can de-risk your cash flow. Warren Buffet used a variation on this trick when he was rescuing Salomon Brothers back in the early 90's.

Van's may yet make it out of Chapter 11. Their founder has personally staked $6M of DIP financing and they've brought in a restructuring team. If they can get that cash back into shipping products and get their pricing right (they've already announced price increases) while keeping their customers engaged they'll do well.

First, growth costs cash and you need to prepare for it. I see a lot of business plans that have crazy growth but haven't yet defined a mechanism to fund that growth. That's a bad combo.

Second, cash rules. Stories abound of SMB owners who were taking their cash home to buy condos, motorcycles, airplanes (ahem), etc. When trouble struck they had a bunch of illiquid personal assets and banks weren't lining up with credit facilities. Make sure you always have access to rainy day cash, by the time you discover you need it you may not be able to get it.