Numbers Don't Lie; Interpretations Might
"A full 17% of respondents admitted that their CEO's had pressured them to misrepresent results at least once" per a 2002 Electronic Business article. How comfortable are you with the financial results used to manage your business?
This article will cover five major areas you might look at or have someone look for you to increase your ability to better know where you really are financially, to be able to sleep better at night. The more of these areas that may be a concern at your company, the more urgent a corporate physical may be.
1. Most companies do not accurately know their top ten customers.
2. Many companies have capitalized some item in the past, whose realizable value will become questionable.
3. Most companies do not know how they will be affected by profitability changes at their top ten customers.
4. Many companies have an asset that strategically they would be better off sel! ling at a loss to pursue some new opportunity.
5. Many companies have painted an overly optimistic picture to a customer, vendor or financing source.
Top ten customer profitability "I am starting to visit our top ten customers. If you find out who they are, please let me know." said the CEO. I have been asked different versions of that question by more than one corporate leader. A little talked about secret is that most companies do not accurately know their top ten customers. If you are willing to define that as the largest customers by revenue, maybe you know this top ten list. If you want to accurately know the ten most profitable customers, good luck. Changes in business, product changes and system incompatibilities often make this difficult to do without getting the right eight people in a room for a day.
A past capitalized item will be questioned. Cisco wrote off two billion dollars of inventory several years ago. Many companies have capitalized some item in the past that will be questioned. Goodwill will be reviewed annually. All of us have read the horror stories of write-offs that in hindsight raise questions that often were not valid or even a factor when those assets originated.
One of my favorites was a company that accidentally set up a sophisticated process that accidentally capitalized part of the write off to that asset in the current year additions to the capitalized asset. If you have reserves, allowances or estimates for loss, why not take a critical look at them at least once a year for downside risk. In more conservative days, the CFO would cover things like this when a year came in better than expected.
Profitability change at the top ten customers Those fortunate companies that accurately know the profitability of their top ten customers normally fail to cross the next hurdle of knowing with conviction how the fortunate company's top customers will be affected by profitability changes to those customers. There is a timeframe when top ten customers drop off the A list.
Having discussed how this affects the best performing companies, guess what that means for the companies who do not accurately know profitability of their top ten customers.
One very interesting exercise I helped on was to estimate the benefit our customer received from our service to see which customers were benefiting or losing money on being our customer. That produced some very interesting and unfortunately accurate estimates of customer retention.
Sell that asset and re deploy the money Has your financial department ever told you that the company has to keep losing money on branch or product because we can not admit to the financial loss the company would have to take if it disposed of the asset? I suggest a lesser version of this situation is failure to look at return on equity related to assets or departments. Many companies have one or more assets they would be better off selling at a loss and re investing in another opportunity. This can be particularly true when the executive bonuses are mainly a function of the dollar level of profitability, with limited influence on return on equity or similar measurements. For those of you who say their company has a mechanism that investment proposals meet threshold rates, how often does someone report back convincingly with what return the investment actually received?
Painting an overly optimistic picture to outsiders Last but not least. How many companies have painted an overly optimistic picture to a customer, vendor, or financing source? If "forty four percent of Americans lie about their work history" per ADP Screening and Selection Services, might they stretch the truth a little while representing your company. The effects of this are really hard to quantify. When does puffery become misrepresentation?
I have told CEO's and groups that Murphy's Law suggests your not knowing your company's real equity and risk areas will be a problem at the worst opportune time. Just take a look at all the items someone like me will ask for using a due diligence checklist, and follow up to see how well your company's rough spots would stay hidden. If you do not have such a list, contact me for an example of a standard list. What will you do next week to understand the soft areas and risk factors that all companies have to some degree?
Author BioGary Patterson is the author of "Numbers Don't Lie; Interpretations Might." He has helped numerous high growth companies enhance growth and profitability. Visit his site to see how you can get a free consultation www.FiscalDoctor.com or mail to Gary@FiscalDoctor.com
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