Can Small Businesses Apply Ryanair's Contrarian Cash Strategy?

As proactive accountants, we're always analysing successful business models to see what strategies can be applied to help our clients drive profit and achieve sustainable business growth. So we are going to examine the controversial but undeniably successful approach of Europe's largest airline.

Ryanair's Contrarian Cash Strategy

Ryanair has grown continuously for over 30 years to become one of the largest airlines in the world. Under the leadership of CEO Michael O'Leary (who previously served as CFO), they've followed a unique and contrarian approach to cash management and investment.

In a recent podcast interview, O'Leary revealed what he considers their "killer strategy":

"We buy our planes when there is a crisis. We generally have a very strong balance sheet... We placed our first order after 9/11 - 25 aircraft - and it was the making of Ryanair. Ever since then, we have also placed orders after the Gulf War, after the financial crash in 2007-2009... During COVID, we increased our order book from 150 to 210 aircraft, reduced the price, and lo and behold, as we emerge out of COVID now, airports all over Europe are looking for traffic recovery and growth, and we're the only airline in Europe taking delivery of 200 aircraft over the next four and a half years that can deliver that growth."

O'Leary compares his approach to farming: making money in the summer, hunkering down for winter, and buying cheaply when others are selling. It's a strategy that has clearly paid dividends for Ryanair, allowing them to emerge stronger from each economic crisis.

Cash Hoarding vs. Cash Flow Optimisation

This approach raises interesting questions for business owners and Finance Directors. Is holding substantial cash reserves a smart strategy or a missed opportunity?

The Case for Cash Reserves

There are compelling arguments for maintaining significant cash reserves:

1. Opportunity during downturns: As Ryanair demonstrates, having cash available during economic crises allows you to capitalise on opportunities when competitors are struggling.

2. Negotiating power: Cash buyers often secure better deals, particularly when sellers are desperate.

3. Business resilience: Strong cash reserves provide a buffer against unexpected downturns.

   
   

Property investors often follow similar principles, building cash reserves to buy at steep discounts during market downturns. Warren Buffett, too, is known for patiently holding billions in cash, waiting for the right opportunities.

The Case Against Excessive Cash Hoarding

From a Management Accounts perspective, there are also strong arguments against holding too much cash:

1. Opportunity cost: Cash sitting idle isn't working for your business. Those funds could be invested in marketing, equipment, or talent that drives growth.

2. Inflation risk: Cash reserves lose purchasing power over time due to inflation.

3. Diminishing returns: The value of additional cash reserves decreases past a certain point.

4. Delayed decision-making: Waiting for the "perfect" opportunity can lead to procrastination and missed growth.

   
   

Applying Ryanair's Strategy to Small Businesses

Can small business owners apply Ryanair's approach? The answer is nuanced.

When It Might Work

1. Industries with long lead times: Businesses that purchase equipment with 12-18 month lead times might benefit from counter-cyclical ordering.

2. Asset-heavy businesses: Companies that require significant capital equipment may find opportunities to purchase during downturns.

3. Businesses with predictable, long-term growth: If you can confidently forecast demand several years out, pre-ordering during downturns may make sense.

   
   

When It's Too Risky

For most small businesses, the Ryanair approach carries significant risks:

1. Limited cash resources: Small businesses typically don't have billions in reserves to tie up for years.

2. Agility requirements: Small businesses often need to adapt quickly to changing markets.

3. Forecasting limitations: It's much harder for small businesses to accurately predict demand years in advance.

4. Cash flow priorities: For small businesses, maintaining healthy day-to-day Cash Flow is usually more important than speculative long-term investments.

   
   

The Finance Director's Perspective

From a financial management standpoint, what's the right balance? Here are some considerations:

1. Know Your Numbers

Before considering any strategy involving cash reserves, ensure your Bookkeeping and Management Accounts are in perfect order. You need complete visibility of your Profit & Loss, cash position, and forecasts.

2. Define "Good Deal" Parameters

As our discussion highlighted, successful investors like O'Leary have very clear parameters for what constitutes a good deal:

"I think in small businesses it becomes a bit more nuanced and people are like 'Is this a good deal? Is this not a bad deal?' They're not quite sure how to decide whether it's a good deal or not, and therefore they make knee-jerk decisions and either pass up on a good deal or take a bad deal."

Work with your Accountant or Finance Manager to establish clear investment criteria before opportunities arise.

3. Balance Today's Needs with Tomorrow's Opportunities

While maintaining some cash reserves makes sense, don't sacrifice current Business Growth initiatives based on speculative future opportunities:

"I always think that if an opportunity is that good and you want it that bad, you will find the money regardless... I don't think you should stop doing the good things that continue to grow your business like investing, like marketing, like recruiting people - all those sort of daily operational things that help keep your business going forward."

4. Consider Your Industry Context

Ryanair's strategy works in part because of the specific dynamics of the airline industry - limited suppliers, extremely long lead times, and predictable long-term demand. Your industry may have entirely different dynamics that call for a different approach.

Conclusion: A Balanced Approach

For most small businesses, a balanced approach to cash management makes the most sense:

1. Maintain reasonable cash reserves for resilience and opportunities

2. Continue investing in proven growth strategies

3. Have clear criteria for opportunistic purchases

4. Work with a proactive Accountant who understands both the day-to-day cash flow needs and long-term strategic goals of your business

   
   

While few small businesses can or should implement Ryanair's strategy in its entirety, the underlying principle of being prepared to act counter-cyclically can be valuable. The key is finding the right balance for your specific business context.

Need help optimising your cash strategy for both current operations and future opportunities? Contact our team of proactive Finance Directors and Accountants at Profit Cash Growth today.

This article is based on discussions from our podcast. For more insights on driving profit and business growth, subscribe to our podcast or contact our team of financial experts.