A few weeks ago, Core Entertainment, which owns the rights to American Idol, filed for Chapter 11 bankruptcy. The reasons cited included loss of its primary and irreplaceable revenue stream, lack of Idol related sales in recent years and an inability to pay creditors their money due. More accurately stated, there was a clear lack of commitment to accurate planning and the company faced the age old issue of “putting all its eggs in one basket.” For that matter, when considering such metaphorical chickens, they also seemed to have counted numerous ones before they hatched.
When broken down, there are a few issues which really stand out and are relevant to businesses of all shapes and sizes. First, they failed to adequately diversify their product mix and customer base. Second, there was a clear lack of honest conservatism in creating their projections and an inability to properly plan for what may come. No management team is equipped with a crystal ball, but facing the future with cautious optimism is a necessity for proper planning. Perhaps they genuinely thought the show would suddenly regain its popularity or perhaps they failed to realize that the lifespan of most successful television shows rarely extends beyond seven years and that their time was running out. No matter which, it’s obvious they failed to face certain realities.
When a business looks at its customer base, it needs to take in the big picture and take note of any customers whose loss could hinder its ability to continue as a going concern. The owners and managers must prepare for the possibility that at some point this customer may no longer wish to continue their relationship. Can your business survive the hit to the revenue stream? Diversifying the portfolio of customers that you do business with can help to mitigate this risk. But, if that’s not an option or you already do this and it’s not enough, then you need to have a plan in place to face the loss. Seemingly as important, the type of plan you have needs to be sustainable. It appears that Core Entertainment fought to continue operations by picking up more debt and just kicking the can further down the road. Sooner or later, that will likely to catch up with you.
Similarly, you must also broaden your product mix so that the sales of one or two core products do not completely carry the company. People are finicky and what is all the rage today may be obsolete next month. If your plan is to sell as many of your hot ticket item as possible today and then close up shop, so be it. But, if your goal is for your company to continue beyond this, then you must work to develop your product mix such that the loss of sales on one or two items does not mean the demise of your business. And you should understand the effects of sales by product on the mix and your margins.
One final tool to help avoid the fate of Core Entertainment is simply proper planning, which requires honesty. It involves closely examining the numbers and finding ways to overcome hardships facing your business. You should be creating annual projections and reviewing them over the course of the year and be proactively prepared to deal with any times when actual results differ from your forecasts. If your primary option is a creditor, make sure you can pay them back.
I have no doubts that Core Entertainment will live to go on and see another day. The courts will allow them to pay back a portion of what they owe and they will find their next cash cow to help afford the next set of chickens. But, until then, they have some struggles and headaches to face. Maybe the final outcome was always the plan. But, for most small business owners, our plan is to see our dreams thrive. With some hard work and honest planning, it can certainly happen.