As we begin the journey into 2006, no one would deny that the U.S. economy was slammed pretty hard this year.
The question is, what impact will Fed policy, a bloated deficit, stratospheric oil/gasoline prices, the aftermath of Katrina/Rita, a less than robust manufacturing economy, and so on, have on the economy as we enter the New Year?
Widely respected TEC (The Executive Committee) economic resource Brian Beaulieu believes that for the short term we can expect a slowdown for the first two quarters of 2006, but smooth sailing after that, at least through 2007.
So from a "just-in-case" point of view, what can you watch in your business that might signal a need for immediate corrective action? Here we go (thanks to another TEC resource Ed Freiermuth):
1. Your accounts payable as a percent of cost of goods sold have increased by 1 percent from a year ago.
2. A lot of management time is devoted to dealing with disgruntled creditors.
3. You have asked for a temporary line of credit increase.
4. Suppliers want C.O.D. payments.
5. Some or all accounts payables are converted to notes payable.
6. Lenders want personal guarantees.
7. Borrowing base alternatives have dried up.
8. Accounts receivables are stretched and pre-billing is being done for products to services not yet delivered.
9. Accounts receivables are being factored or have been converted
to notes receivable.
10. You have a sharp rise in uncollectible receivables.
11. The customer base of your business is shrinking.
12. Inventory levels are high and turns low.
13. A physical inventory results in an unexpected write-down.
14. Operations cash flow is negative.
15. Net working capital is negative.
16. Financial and operating data reports are late, inconsistent, or in error.
17. A reclassification of prior period financial statements leads to a costly "audited" assessment.
18. You are overdrawn and living off the "float."
19. Payroll taxes and other fiduciary-oriented funds are diverted to meet pressing business uses.
20. You, as owner, start borrowing from the business, thus deferring income and FICA taxes.
21. As a result of operating losses, the debt-to-worth ratio has declined to the point where the business is no longer bankable.
22. Purchasing and personnel controls have become sloppy.
23. Employee morale is in the pits,
and there have been some key employee defections.
24. Problem analysis is "blaming" the outside situation and not dealing with internal shortcomings.
25. Profitability of individual product or service lines is not being determined by using direct costing techniques.
26. Unit sales have been steadily declining.
27. Selling, general and administrative expenses (SGA) are rising with no commensurate rise in sales.
28. Interest expense is increasing at a faster rate than sales have been increasing over the last 12 months.
29. Sales forecasts and backlogs
are inverse.
30. You and your managers have not let people go, cut wages, salaries, etc.
Freiermuth claims that if you have two or three of these symptoms, it isn’t cause for alarm. Between five and 10, he says, and it’s time to take a hard look at your financials. More than 10, he says, start the prayer chain.
I don’t agree with him, for what it’s worth. A business is a system. The components are cash-driven to be sure. But in between, there is ample warning of impending failure. It just doesn’t happen overnight.
But I like the concept of a management checklist. It seems to me that the checklist includes a review of balance sheet trends, with a focus on liquidity. It seems to me it focuses on the income statement with a focus on gross margins. Finally, I think the checklist includes business-specific operating ratios that speak to the operational efficiency the business is experiencing.
As we all march into the new year, for better or worse, I think you should have a well-defined business strategy that embraces the prospect of both business advances and business retreats. I know that many of our TEC members do this at all three levels: balance sheet liquidity, income statement strength and operational performance results.
This approach, perhaps simplistic on the one hand, can prevent many unwanted surprises on the other hand. Furthermore, having a well-defined business strategy begs the obvious: that it is developed and shared with all the key players on the management team.
Let’s face it. When business conditions are tough, there is no point in going at it alone as the business owner or CEO. The more data and information that is shared among key players, the more they can become a part of the solution as opposed to a part of the problem.
And this is where personal goal setting can become so important. If each manager can tie his or her personal goals to a system of corporate accountability, then the likelihood of a business "blackout" is significantly diminished. A manager can only do this if key performance indicator information sharing is part and partial to the firm’s culture.
I remember years ago sitting across the desk from a CEO of a well-known Milwaukee-based aluminum-castings foundry. We talked about sharing "the numbers" with his key employees. He was adamantly against it. "All they need to do is do their job," he said. You guessed it. They are not in business today.
Check the checklist. Do your strategy. And share with anyone and everyone who can help you achieve it. Until the New Year, here’s to a prosperous 2006.
Harry S. Dennis III is the president of The Executive Committee (TEC) in Wisconsin and Michigan. TEC is a professional development group for CEOs, presidents and business owners. He can be reached at (262) 821-3340.
Small Business Times, December 16, 2005, Milwaukee, WI
