By: Gary Patterson
"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 selling 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 Bio
Gary 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
By: Gary Patterson
"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 selling 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 Bio
Gary 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
