Several years ago, our team was approached by the owner of a boatbuilder — one many of you would recognize — who was looking to sell his business and retire. And, frankly, a big part of the reason he wanted to sell and retire was his continued frustration with the performance of the business. His company was underperforming, even in a good market for its segment.
We agreed to consider an acquisition and began looking at the company’s information, including financial statements. It was a disaster. The financial information was almost indecipherable, and when we did some digging, we found significant problems. As one example, we noticed that they were selling an engine offering for less than they were paying for it.
Many buyers would have kept this information to themselves and tried to acquire the company inexpensively, but we took a different route. I met with the owner, told him what we had found, and shared what I thought he should do to fix his business. At the top of the list was to find a new accounting person, and he took my advice. The next day.
This company was missing some foundational financial tools every leader should ensure are being utilized at their organization. Here a few.
Targets
We set targets for our companies through our strategic planning and budgeting processes. This gives our teams goals to work toward and a way for their performance to be measured. Both strategic planning and budgeting force a team to look to the future and not only project revenues, but also create a business model that ensures profitability at those revenues.
I am often surprised when we review another company’s financial records and learn they do not have a budgeting process. Companies without budgets lose out on the benefits of goal setting, cost management, benchmarking and accountability. Every company should have a budget; it forces teams to look to the future, and that’s good.
Timely Information
Every leader should receive a daily report with information on cash and shipments. This information should be compared to the organization’s budget to give the leader an idea if the organization is performing up to standard.
Throughout the month, leaders should receive information on month-to-date sales and a projection for the current month and the next few months. By the month’s end, leaders should have enough information to know how their organization performed, even before receiving the financial statements.
Finally, leaders each month should receive the prior month’s financial statements and a summary of key indicators that drive their business. If a leader is not receiving all of this by the 10th day of the month, they probably don’t have the right team managing their financial affairs.
Analysis
Even the most basic analysis would have identified the issue we turned up when we considered the builder acquisition, where the company was selling products for less than their cost. Our team identified it in minutes. Good financial statements should provide a tremendous amount of information, and good leaders should resist the temptation just to review the bottom line and act from that number alone.
For instance, each of our companies prepares a detailed monthly analysis regarding their margin. A lot can be buried in the margin calculation, but we work hard to ensure everyone has a clear picture of everything going into that number and how it compares to the budget.
Managing Cash
Some people have a hard time understanding that profitable companies often go out of business, but it happens all the time. If a company’s liquidity is not managed well, it can bankrupt an otherwise profitable company. Cash must be supervised closely and daily.
Working capital — receivables, payables, inventory — must be managed equally as closely because they are the nearest thing you have to cash. For many businesses, the area of working capital most likely to get them in trouble is related to inventory. For all our Correct Craft companies, we keep a close eye on not only dollars invested in inventory, but also monthly and annual turnover.
An equally important part of cash management is capital allocation for items that require cash now but return the cash over several years. Our capital approval process template considers each capital investment in light of discounted cash flow and net present value. As CEO of Correct Craft, I view capital allocation as one of my most important jobs because it significantly impacts both today, as a use of our cash, and the years ahead.
Accountability
Every month, each of our company presidents presents their financial results to me and others on our executive team. I am a CPA, so it would be easy for me to just read the financials and skip the presentation, but I want each president to demonstrate that they are fully engaged with their organization’s financial results. It also gives me a perspective on how they view their business and a chance to ask questions. I know it takes time for them to prepare for these meetings each month and present this information, but I believe it is time well spent.
Every company should be doing the all of this at a minimum. If you don’t have such procedures as part of your business, don’t try to figure out how to get them. Think who. The right financial leader and team will be invaluable for your business.
We have a great team at Correct Craft who do all the above, plus some. As I write this, we are finalizing our year-end audit, which is very complicated and involves dozens of entities. Once again, we will get through the audit with no changes recommended by our auditors. As a leader, it is comforting to know that the information I look at each day related to our results is trustworthy.
Having great financial controls and information will not only give leaders the tools they need to run their business more effectively, but will also make running their business significantly easier. And it provides tremendous peace of mind.
Bill Yeargin is CEO of Correct Craft and the author of five books, including the best-seller Education of a CEO.
