Monday, August 20, 2007

The Top 30 Indicators of 
Future Financial Problems

By Fred Leeb
Many organizations today are facing extremely tough financial and operating conditions that are only likely to get more difficult.  In this kind of environment, it can become too easy to fall victim to denial--just buy time, make do, cut corners, rely on the business cycle to improve eventually or count on the big deal to finally come through.  The difficulty in achieving success may cause leaders to ignore reality or bury themselves in day-to-day minutia so they can remain in their comfort zone and continue to whittle away at familiar issues in their own way.  Sometimes, however, these practices may actually cause executives to continue using the wrong tools and go on the wrong path without even knowing that the situation is getting worse.  They may not realize that other solutions may be much more effective or that they are not even working on the true underlying problem. 

The purpose of this article is to serve as a periodic reminder for CEO's and CFO's (much like a pilot's pre-flight checklist) to help them foresee financial problems looming on the horizon before they take the plane up in the air.  Even the most experienced pilots recognize they need to:

  • Use their checklist so as not to take anything for granted-they know that the passengers are relying on them and that the smallest problem eventually may cause a disaster if left unchecked. 
  • Take the checklist process seriously because the it is the culmination of lessons learned--serious errors made by other pilots, experience on the likely causes of failure and the potential benefits of fixing/maintaining key elements before takeoff. 

The Checklist-The Top 30 Indicators of Future Financial Problems
Strategic Issues
    1.            Existing strategies are not taken seriously and they are not even widely-known by employees.
    2.            Management has not collected any data to prepare thorough analyses to prove and test its view of the future.  Management believes that the organization's strengths and weaknesses today and for the future are the same as those that existed five years ago.
    3.            No serious efforts are being made to identify the strategies being pursued by the major competitors or to foresee the impact of their strategies-there is no definitive understanding of how the playing field will change in 3-5 years.  
    4.            Reinvestment has been cut to the bone or eliminated even though this will make it even more difficult to compete in the future (e.g., IT upgrades, new production equipment, or a move to a more desirable location are considered to be out of the question).
    5.            Nothing is being done to attract and retain excellent employees (e.g., no promotions, raises, training, opportunities for greater responsibility, recognition, appreciation).
    6.            No thoughtful contingency plans have been prepared.

Organizational/Morale Issues

    7.            The CEO believes that he/she must carry the entire organization on his/her own shoulders because the CEO believes that other employees do not care as much or can not be relied upon in difficult situations.  The CEO is the only remaining after 5 o'clock.
    8.            In the last few years, employees have not offered any new ideas or suggested new ways to expand the business significantly.
    9.            No money is budgeted to enable significant change.  Success is considered to be just achieving last year's results and no real growth has occurred for years.
10.            Most of the employees believe that they do not need to be concerned about success and have no sense of urgency because management has not given them information as to whether performance has been good or bad.
11.            No obvious actions have been taken to renegotiate purchase agreements, sales contracts, loan agreements or leases and nothing has been done to cut unnecessary overtime or employees that everyone knows to be dead wood.
12.            Wages have been frozen repeatedly merely because that is the largest controllable expense item.  
13.            There is relatively high turnover in important positions because people are frustrated by family members and friends filling many key slots; family members are well-paid even though their achievements have been mediocre and they have little expertise or relevant experience.
14.            Employee morale and pride are low.  Even the green plants inside the office are scarce and unhealthy, offices are not clean and the landscaping outside is overgrown and full of weeds.
Financial Issues

15.            The strategic plan does not incorporate this year's annual budget and the strategic plan does not include financial projections.  Financial data is not used for decision-making.  It is comprised primarily of historical rather than projected results, is often available only long after the period is over and it is not tied to the budget in a meaningful way.
16.            Operating personnel believe the budget and financial plans are not for their benefit and they are neither familiar with nor responsible for projected results.  Operating people have their own means of measuring success but these are often unreported and informal.
17.            The financial personnel are not working as team members with other functional departments to identify and resolve key issues.
18.            Financial information consists primarily of the income statement and little or no serious consideration is given to understanding the impact of the balance sheet or cash flow statements.
19.            The cash flow presentation uses the indirect method based primarily on changes in balance sheet accounts such as accounts receivable and inventory rather than cash inflows from collections of accounts receivable and outflows for payroll, benefits, taxes, materials, rent, etc.
20.            Typical collection periods for accounts receivable have been getting longer and a large chunk has remained uncollected for a long time.
21.            The proportion of accounts payable over 90 days has increased over time and a major portion has not been paid for a long time.
22.            The company is borrowing from the government by not paying withholding taxes, property taxes, or income taxes.  Paying penalties and interest to vendors have become a normal cost of doing business.
23.            Required reports are not being provided to the bank on a timely basis. 
24.            The credit line is constantly at its maximum and is viewed by management to be perpetually inadequate.
Outside Stakeholders

25.            The board is comprised primarily of close friends and family members of the CEO.  Prominent businesspeople do not want to be associated with the organization and it is extremely difficult to recruit them for board or advisory positions.
26.            The CEO does not take seriously the auditor's findings and management letters.  The auditors, therefore, work to be done and out of the organization as quickly as possible, minimizing their added value.
27.            Outside attorneys have been chastised by the CEO for offering any suggestions based on their knowledge of the business. Attorneys must wait until they are asked a specific question because they believe that the CEO's top priority is for them to minimize their fee on the crisis at hand.  It makes no difference that the problem could have been avoided completely if addressed earlier.
28.            Vendors are constantly screaming for payment because they have been trained to do so-management has not been able to articulate a reasonable plan to help them understand how much or when they will be paid.
29.            Other vendors and employees have given up on informal negotiation processes and believe they must litigate.  Cases do not get resolved even though legal fees have been ramping up.
30.            No other organizations have been offering to form alliances or joint ventures with the subject company-they do not see strengths that will be advantageous to them.

The Bottom Line

The first and most difficult step towards true success is recognizing that there may be problems lurking below the surface that are not obvious without an experienced guide and a checklist.  Sometimes other points of view and analyses may be extremely worthwhile even if it means a slight delay in getting the plane airborne.  Generally, CEO's are highly capable, successful people who already are doing their best to do well.  With a guide and a checklist, however, they can step outside of themselves periodically to rise to the next level of success.     
An experienced consultant can provide:
  • Valuable perspectives to help make a prudent decision,
  • Manpower to get the job done with a sense of urgency at a critical juncture ,
  • New ideas and creativity from understanding how other organizations have faced similar issues,
  • Objectivity needed to get past roadblocks and vested interests and gain the most value for the organization as a whole, and the
  • Confidentiality for your employees so they can be forthcoming with many new ideas and procedures without fear of criticism or retribution.
The best leaders are those constantly looking for good ideas everywhere and constantly learning from others.

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