WANTED: Cash guardians.
Job Description: Must have a savvy understanding of business financial
fundamentals. Must know when to say, "The buck stops here." Must have
significant financial yardsticks for long-term success, while using a financial stethoscope to measure the pulse of day-to-day financial operations. Must understand the relationship between the wonder of business growth and the agony of cash failure.
Call today to find out more.
Is this a job description for a bookkeeper? An accountant? A controller? A financial V.P.?
No, none of the above. It is but one part of a CEO’s job description. Companies that wander inadvertently onto financial landmines, in most cases, can thank the CEO – for failing to perform effectively against a very important part of the job description.
Within The Executive Committee (TEC), CEOs hold each other accountable at every meeting against key indicators that members use to gauge the financial health of their businesses. Fellow members look for annoying trends that might signal future problems. But, I’m getting ahead of the story.
Indicators are useless without the CEO’s attention to five important specific financial issues:
1. The presence of timely and accurate accounting and reporting systems.
2. The identification of the right numbers/
key indicators to watch (they vary from business-to-business).
3. The ability to independently read and truly understand three key financial documents: the balance sheet,
the income statement, and the cash flow statement.
4. The ability to manage cash flow on a daily basis.
5. The ability to use financial information to forecast the future.
In short, what separates the CEO’s role here from anyone else assigned to document the company’s historical financial performance is that the CEO must use this data to forecast the future. This is where too many CEOs simply drop the ball. In a good growth business, failure to do so can, and mostly likely will, lead to catastrophic results.
So what can you do to anticipate future financial requirements-that is, requirements for the next month, six months, a year and so on? My thanks once again to Debbie Kossow, partner at Clifton Gunderson, LLP in Milwaukee, for validating these remarks.
First, you need a sound financial plan. It should include three elements: a historical analysis, a one-year plan and a three-year plan. The historical analysis (going back three years on the income statement, balance sheet, and cash flow reports) provides a blueprint of what has happened-both good and bad-that can be incorporated into future plans.
The one-year plan, projected monthly, and the three-year plan, projected annually, should contain four key components:
Income statement. First, develop a net sales forecast and determine your expected gross margin percentage in total and by product or service line. Then, estimate your total and allocated operating expenses, including allocated overhead, and use all three figures to determine your expected profit (loss).
Balance sheet. If your projected net income plus the projected increase in variable liabilities (payables, payroll and other debt) equals or exceeds the increase in projected variable assets (inventories, receivables, fixed assets or other assets), the company will have the resources to finance itself. If not, you will need to secure additional financing.
Cash flow statement. The income and balance sheet data supply the basis for your cash flow forecast. From a forward planning perspective, you are most interested in knowing when you will need to inject more debt or equity into the business to support your anticipated growth requirements. (A note regarding cash flow: Accountants have a mesmerizing assortment of cash flow projection devices, some of which are based on traditional accounting principles. Others use existing tax and depreciation assumptions. The bottom line is that on a monthly basis you have directly measurable inflows and outflows. The obvious goal is to always have your inflows exceed your outflows.)
Key balance sheet and income statement ratios. You never want to grow at the expense of the balance sheet. Early warning indicators such as your current ratio, quick ratio and debt-to-equity ratio are great balance sheet indicators to track and project monthly and annually in the one-year and three-year financial plan. Similarly, gross profit ratios, pretax profit ratios and operating expense to net sales ratios do the same for tracking and projecting your income statement.
Assuming your financial plan is in place, you are now in a data-educated position to manage the plan. It’s at this point that you integrate your available financial management resources to implement it.
Anyone who can affect the cash position of the business should be on your financial planning team, including your banker. The issues to promote as CEO are:
1. Generating value-added sales.
2. Reducing waste (unnecessary expenses, superfluous costs).
3. Balance sheet control: inventories/
payables/receivables
4. Performance-based incentive compensation.
A panel of TEC financial experts recently concluded that you don’t need an MBA in finance to be a good financial CEO. But they agreed that the sharks will start to circle if you experience four of these nine symptoms of impending financial business failure:
1. Poor cash flow management (no cash flow plan).
2. The wrong mixture of debt and equity in the business.
3. No financial plan.
4. Absence of timely and accurate financial statements.
5. Inability of the CEO to understand the financial reports.
6. Lack of knowledge of direct costs by product line.
7. Failure to annually renew negotiated bank credit lines.
8. Failure to discontinue unprofitable business relationships.
9. Failure to see the big picture.
Most of our TEC members have probably fallen asleep at this point because I’m preaching to the choir. Here’s hoping that this is all no news for you as well. Until next month, good financializing.
Harry S. Dennis III is the president of TEC (The Executive Committee) in Wisconsin and Michigan. TEC is a professional development group for CEOs, presidents and business owners. He can be reached at (262) 821-3340.
September 3, 2004, Small Business Times, Milwaukee, WI
