The Most Most Important Report

Several years ago I interviewed for the position of CEO of an international manufacturing firm. This firm had just come out of bankruptcy -- manufacturing and a turnaround, a perfect combination for me.

I was asked "which chart or report would you say is the most important one for the CEO to focus on?" Even before answering, I knew right then I probably wouldn't get the job.

Cash. The most important report is a daily cash report. This is certainly true for a turnaround company, and likely true for any company that wants to avoid becoming a turnaround company. How much cash and debt does the company have? Is this getting better or worse? Is it following plan? Are my people educated in understanding what makes this move? Do they understand how their actions every day will effect this report?

Very few people will understand this until they live it. They will instead say...on time deliveries, quality performance, inventory turns, new orders, etc. All of these are important. However, unless actions taken in these various disciplines result in improving cash, are the managers really taking the best action?

Publish the report daily. Distribute it widely. Everyone with the authority for expenditures and commitments of company resources should see it and understand it. They should learn how their actions every day will impact this chart.

Make it a discipline to forecast cash. Ensure that all organizations that have authority to commit and spend resources take ownership of their part of the forecast. Drive the forecast to a daily forecast in the near term.

There are many objections to these ideas. It is best that you break free of these.

For example:

1) This is a very short sighted view -- how would you ever invest? If the only focus is cash, the company will make very short term investment and spending decisions.

Nothing is written that says that the numbers could only go one way. If the company has plans to make investments, the numbers could go the "wrong" way for a time. However, such investments come with forecasts and eventually these forecasts must turn positive, else why invest?

2) This is a job for Treasury. Our sales people, purchasing managers, plant managers, etc., have other things to worry about besides cash and forecasting cash.

It is a fallacy that Treasury controls cash (like it is a fallacy that controllers "control" spending or anything else, but a topic for another day) Rest assured they will worry about those things anyway -- it is what they do, it is in their blood. Cash is the lifeblood of the organization. In the end, with it you have every option available to you, without it you have none. Knowing in advance where you are headed with cash allows for planning that most organizations do not consider. And training all management to understand their impact on this inherently makes better the chances that the company will avoid liquidity and funding problems in the future. What is wrong with having a company full of complete businessmen and businesswomen?

3) We can't share this widely, it is a company secret.

You trust your management with the very existence of the organization -- every day they take actions that bind the company. But somehow they cannot be trusted with this information? How will people work on something if they don't have information about what they are working on? Train them educate them -- their increase in knowledge on this subject will only strengthen the organization's financial condition.

In every instance where I have come into a troubled company -- and the many where we have conducted due diligence but not taken the deal -- among a few others, there was this consistent theme: only someone in finance knew this stuff...maybe. In fact, the most engaged didn't even track cash and debt, only availability. Tracking availability is for the dying company and is understandable in bankrupt companies. But when asked if they tracked cash or debt before they knew they were in trouble, the answer invariably was no.

Cash forces management to look not just at some form of earnings (with all of the inherent "bookkeeping" problems in this measure) but also the balance sheet. Many companies lose track of the balance sheet because they are only focused on operating earnings or some other earnings measure.

Have no fear, plant managers will still deliver parts, sales people will book new orders, engineers will still develop new product -- and these can still be measured. In the meantime, training them on cash, and instilling the daily discipline of focus, will ensure that you have countless cohorts watching the financial condition of your firm.

Regarding the job interview I referenced at the beginning of this post: I didn't get the job. I don't know why, but I know they didn't like the answer about the most important report.

And the company went back into bankruptcy two years later.

We Are All In This Together

In many organizations, the rules seem "different" for the boss. It is easy to become cynical in an organization where the rules seem inappropriately different for different levels of employees. The issue is not one of perfect equality, but relatively equal treatment. For example, no one expects that the CEO and the accounting clerk earn the same pay. However, it seems reasonable to most that the fruits of success and the costs of poor results somehow are more evenly distributed.

This idea can effect many areas: compensation, staffing, layoffs, benefits, etc. For now, I will focus on compensation, and one specific item of compensation -- the annual bonus. There are many issues I have found with most bonus plans that render them completely ineffectual at motivating the intended behaviour -- they are too complex, the formulas can be manipulated, the end of the year comes and no one is quite sure if they will get a bonus and if so how much it will be, at the beginning of the year the employees recognize how hopeless it is to reach the targets so the plan is not an incentive. Over time I will likely address each of these shortcomings.
For now I would like to address the idea that bonus plans should be developed that affect all employees proportionately.

What do I mean by this?

1) A bonus plan should affect all employees -- that is, to the maximum extent possible, all employees should be covered. Yes, I understand union issues, international labor regulations and other factors can hinder this. However, it doesn't preclude the objective -- and that plans should be set and tracked toward achieving this objective.

2) Maximize the opportunity to group people into logical units -- by factory, business unit, etc., where performance can be well measured and understood and that there is some commonality of work product. A group of the total organization is probably too high, and by individual is certainly too low.

3) Avoid individual metrics and performance criteria for purposes of earning a bonus. These are always too much trouble to administer. I have seen too many times where almost every employee has achieved 90%+ of their objectives and earned a great bonus while the company is losing money and the value is deteriorating. Individual metrics and objectives should be used for individual performance measurement that results in raises, promotions...or severance.

4) Either all covered employees should receive a bonus, or none do. This should apply from the CEO on down the line. The idea is that if the organization is having success, then everyone should share in it. If the organization is failing, everyone should feel the pain.

This does not mean that everyone in the end receives the same bonus -- the percent of bonus to salary can certainly be different (and likely higher) the higher one goes on the organization chart. However, it does mean that the formula for bonus determination is common, and it does mean that the performance of the group means much more than the performance of the individual.

Yes, you might ask -- why should we pay a poor performer a bonus? I would ask why are you keeping a poor performer on staff? If they are good enough to be employed, then they are part of the team and should share proportionately in the success.

You might ask -- why should I limit the upside to a good contributor by the average performance of the group? I have seen this handled a couple of different ways: with an additional bonus to the exceptional performance, or conversely, nothing extra -- thereby emphasizing the "team" concept. I cannot strongly choose one over the other as I have seen both handled well.

There are many details to consider in such a plan, and cannot be answered in a blanket manner. These details and answers depend greatly on the circumstances of the company and the leadership style of the CEO. However most critical is to instill a belief in the entire organization based on fact -- that is the CEO and the top executives will not treat themselves well when the rest of the company is suffering. That the fruits of good performance will be shared, as will the pain of poor results.

When such a system is implemented, clearly communicated, and managed well it can go farther to bringing a team together than any other tool available -- and certainly safer and more effective than jumping off a cliff onto a canvas held by your Human Resources director or other such "team building" activities.

Welcome

I have spent the better part of my career in turnaround management. Over the last 13 years, I have been an officer and / or director in several privately held companies. These companies have ranged in size from $200 million in revenue to over $2.5 billion. All but one of these were acquired out of bankruptcy (or near bankruptcy) and all successfully turned around, with profitable results for the owner. In all of these acquisitions, there was not a single instance of a failed turnaround.

I have held several different roles in these situations -- President, Chief Operating Officer, Chief Financial Officer, Chairman of the Board, Chairman of the Compensation Committee. I have also been on the Audit Committee of the Board, and have served on five different boards. Additionally, for four years I was Chairman of the Supervisory Board of a German company -- a wonderful and unique experience. As you might expect, in some cases I played an instrumental role with day-to-day responsibilities, while in one or two I was merely along for the ride...well, maybe providing some guidance.

My intent for this blog is to document and convey some of the tools that I have used in these endeavors. I will not claim that these tools and processes are for everyone, and I have no intent to debate what does or doesn't work -- management is very personal, and style and approach greatly depends on the business leader and the circumstance. What I do know is what I have found to be important for me, and that these have worked for me.

Additionally I will certainly never claim that I solely developed or implemented these. I have had the good blessing to work with many wonderful and capable people, and the story would not have been possible without the hard work and dedication of many wonderful coworkers. In the end, these relationships have been the best thing to come out of my work.