Step 8 in Avoiding Bankruptcy – Connecting Operations and the FinancialsDid you know that successful companies have learned how to rapidly connect the dots between operations and the financial statements? They know that financial statements are after-the-fact and tell management very little about the current problems and the actions that need to be taken.
Poorly organized financials can falsely lull management into thinking the business is doing well, in fact, it when it may be teetering on a precipice.
The Driver Report
Successful companies identify and track their drivers, the engines of their business. They assign management responsibility for each driver and clearly show how each driver impacts the financial statements. Through the decades we have determined that having an effective set of CEO Driver Reports is often the difference between success and failure.
A foundation of The KGI System™ is assessing – or creating – our clients’ CEO Drivers Report.
Imagine receiving daily and weekly reports that monitor financial performance well in advance of receiving your financial statement, and identifying opportunities that effect future performance. Imagine your management team focusing their effort on the most critical activities that drive the business.
The month-to-month surprises will be replaced by a business that is in full financial and operational control. This process aligns financial reporting with operations, systems, and human resources to realize the CEO’s vision while creating a sense of excitement and empowerment at all levels.
A Case in Point
We developed a top level report for a $140M Catalog Retailer. After dividing the company into Responsibility Centers (e.g. Quality) we assigned each to a particular executive. No single Responsibility Center was assigned more than four driver reports to ensure control. Goals were distilled from the company’s annual plan and each driver’s data was tracked.
Performance was measured in five categories and assigned a “Status” classification:
Below is 1 of the 25 drivers created for the Director of Purchasing as part of the CEO Drivers Report:
The Director of Purchasing had a serious inventory problem when considering the 6.8 actual turns versus the 12.0 goal. This problem required a buildup of cash and a greater need for warehouse space. When the CEO saw this set of reports, he immediately asked for a plan including specific actions, deadlines and resources required.
Subsequently, the Director of Purchasing determined the low turnover was primarily the result of:
- Failure of purchasing to consider economic order quantity (which can be calculated) because of fear of stock-outs
- Poor layout of the warehouse
- An antiquated product coding system
The correction took 6 months to achieve the targeted 12 turns. Using a guideline that holding costs can run 15% or more of inventory value, the correction yielded an extra $945K in EBITDA. Moreover, the $6.3M incremental cash flow could then be reinvested in other opportunities to increase profits or grow the business.
As I consider the multitudes of companies we’ve helped, many experienced distress due to a rapid change in the market. Undetected, this change consumed cash in the form of bloated inventory, mistakenly extending credit on A/R, and maintaining excessive staffing levels. Often, these clients had several opportunities for profitable growth that they could not realize due to a lack of financing.
A structured approach to connecting operations and the financials is a necessity and the CEO Drivers Report is one of the best ways to make this connection on an organization-wide basis. When CEO’s establish the discipline of a CEO Drivers Report, they take a very important step to ensure their company optimizes performance, reacts quickly to marketplace changes, and avoids the perils of bankruptcy.
Whether a Company is struggling financially or on the cusp of breakthrough growth, KGI can help. Our seasoned experts work alongside management to solve complex cash flow issues, operational challenges and other business crises. If liquidity or sale is needed, KGI provides a powerful combination of services and expertise to achieve outcomes that cannot be duplicated by other standalone consulting firms.