As I sort through our daily barrage of emails, I see more than a few offering webinars or workshops or white papers promising to help business owners learn how to read their financial statements. All very nice and certainly addressing a need we frequently see when we take on new clients. But none of them talk about the real secret in financial statements – the stuff between the lines – or between the numbers – that provide critical information for managing the business. Call it financial analysis or reading the tea leaves, most CEOs don’t see it in time.
Brings to mind a client of ours, a company with owners looking to plan their exit and considering the sale of their business as an exit strategy.
Only one problem. After years of profitable operation, today they’re not making any money. Inflation has added to their costs, too many fixed price contracts have prevented them from passing (most of) those costs through to their customers, and the barely recovering economy hasn’t boosted sales enough to cover the increases in overhead costs once considered fixed. To top that off, customers are paying more slowly, and our client has tapped out their credit line to pay their own bills because their customers aren’t paying on time. Finally, their biggest customer – the one with most of the fixed price requirements – wants to extend their contract into the future, ideally retaining as many of those fixed prices as possible.
Hard to see a bright future with that as a starting point. What can they do now?
Here are some ideas we suggested to try to make lemonade out of lemons:
- Start now to educate their big customer that future anticipated price increases will have to be built into any new agreements, and do the research to be able to defend the pricing they want to get.
- Help their big customer understand that competitors are facing the same cost pressures and will not be ready to bid at pre-inflation pricing just to buy the business.
- Put more effort into identifying those costs that have increased in areas that can be passed on to customers, and get that into their billing system to ease the pain a bit.
- Be more assertive in getting customers to pay on time to ease the pressure on the company’s credit line, and get it paid off or reduced as much as possible.
- Try to capture more profitable business by learning what areas of their market have the best future prospects, and go after that business aggressively.
- In the end, be prepared to stick around a couple more years so that profitability is either recovered or clearly on an uptrend, so that a buyer can expect a positive ROI rather than buying a turnaround opportunity.
How did we get all that from interpreting their basic financial statements? By reading between the lines, because that’s what we do.
We are Your CFO for Rent.