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the money owed to a company if it has several large customers.

Doing something as simple as concentrating on getting paid by these
people can have a significant impact on raising a company™s cash posi-
tion. Consider keeping a list of the customers who owe you money and
rank them from the largest dollar volume to the smallest. Enter the top
10, from largest to smallest on this worksheet. Keep track of their pay-
ments and who is responsible for contacting them. What percentage do
your top 20 receivables represent of accounts receivable? Are any of the
customers on the list still buying on credit? Do you have limits as to how
much credit you will allow?

Perhaps the best use of accounts receivable days and payable days as a
management tool is to compare the two. Average the time it takes to pay
your bills and the time it takes to collect. If it takes longer to collect ac-
counts receivable than pay your bills, in effect, you™re subsidizing cus-
tomers. If it takes longer to pay than collect, you™re effectively making
money from the process.
80 Set High Standards


• Develop a good credit-checking system.

• Send your bills out faster, and follow up with phone calls when
an account becomes overdue.

• Establish a strict collections schedule and follow it faithfully.

• If your cash flow is strong, you may be willing to give extra
time to pay in exchange for additional compensation.

• Keep managers and employees informed when collections be-
come difficult with products they develop, make, or sell. They
may help with strategies for collecting. They may also know
something useful about the customer that will help in collec-
tion efforts.

• Don™t be afraid to pick up the phone and call the company

• Don™t wait too long to get attorneys involved if all else fails. A
legal letter and some minimal action can often bring about
quick payment.

Managing Your Inventory

Another cash drain is excess inventory. Without adequate controls over re-
ceivables and inventory, it™s entirely possible for a company to make a
profit and still go out of business. Whenever and as much as possible, you
should integrate inventory management with customer service and deliv-
ery programs. The object is to keep as few units on warehouse shelves as
you can.

The cost of carrying inventory is expensive. Some manufacturing com-
panies pay 25 to 30 percent of the value of their inventory for the cost of
borrowed money, warehouse space, materials handling, staff, and trans-
portation expenses related to maintaining it for one financial quarter”
three months.

These numbers shock people. Once they realize how expensive inventory
can be, they look at it differently. Many owners and managers never
Understanding the Numbers


Unity Forest Products, Inc., a California-based lumber company,
thrives by scrupulously monitoring its cash flow and related items
such as inventory, accounts receivable, and accounts payable. In a
volatile business, it combines efficiency, knowledge of its cus-
tomers™ needs, and close attention to financial detail to succeed.

Unity started as a bootstrap operation run by a collection of long-
time mill workers who didn™t fear competing with the industry™s big
players. Lumber is a heavily capitalized, low margin business, and
bootstrappers don™t usually have the money to get in the game. CEO
Enita Elphick and her crew needed $1 million to get started. In 1987,
when starting out, the management team had only $350,000 in cash.
For a short time, Unity bought lumber from sawmills, subcontracted
the resawing, and then sold the wood wholesale to lumberyards.

Elphick had refined a just-in-time inventory management concept
into a five-year business plan that depended on weekly cash flow
projections”unusual for any start-up, let alone one in a volatile
commodity business. Unity claimed it could turn inventory over
every 10 days; the industry average was 58. The company also
claimed it could collect accounts receivable in 10 days; the industry
average was 27.

Management looked everywhere for cash to build a new mill but
had trouble persuading lenders to back its plan, which lenders con-
sidered so aggressive that they doubted its projections. Wells Fargo
approved a $150,000 credit line that Unity never touched. Finally,
the bank lent Unity the cash to get started.

Elphick offers her customers a 1 percent discount if they pay within
10 days. In turn, it gets a 2 percent discount from suppliers if Unity
pays within 10 days. Competitors see that Unity has figured out
that the most significant expense in the lumber industry is carrying
a lot of inventory.

Unity also keeps close track of receivables. At one point, a customer
who owed the company $40,000 was about to declare bankruptcy.
Unity managers drove several company trucks to the customer™s
plant and repossessed the lumber before sheriff™s deputies could
arrive to lock up the facility. This tenacity and attention to detail is
in part what makes this company thrive.
82 Set High Standards

make this realization because the cost doesn™t show up on any statement,
and, therefore, they have to calculate it themselves.


There™s nothing like a brush with disaster to show you what matters and
what doesn™t, as the Wisconsin-based Carson Pirie Scott department
store chain learned during a bankruptcy reorganization in 1991. The ex-
ercise taught management to improve performance by paying close at-
tention to the company™s real-time financial position, which is key in
retailing with its turnover and stiff competition.

Michael MacDonald, then chief financial officer, tracked sales and cash
position on a weekly basis. As he said, “You really have to manage a busi-
ness on a detailed basis and on a frequent basis. You don™t just look at it
now and again. You have to look at it all the time”every day.”

The company used a five-inch-thick business plan to chart its way out of
bankruptcy. Its creditors insisted that the retailer remain wary of vari-
ances from budget. The business plan became the company™s road map
away from disaster. “There™s an axiom in retail that says retail is detail,”
MacDonald says. “You need to track sales on hand on a very detailed
basis. We have pretty sophisticated methods to check what sizes and col-
ors are selling.”

For key indicators, managers chart sales per square foot, comparable-
store sales growth (to show market share), and operating profit as a per-
centage of sales and earnings.

As MacDonald points out, cash and inventory “require continuous fine
tuning and monitoring.” The challenge is to make sure that the shortage
of cash doesn™t choke off the flow of in-demand products.

He describes the goal of his financial scorekeeping bluntly: “The main
purpose of a business is to maximize shareholder or investor value.” He
watched a number of indicators to achieve that end, all tied to what the
company called the three keys to successful retailing”effective merchandis-
ing, giving the customer a positive shopping experience, and marketing.

The attention to detail paid off. Within two years, Carson Pirie Scott had
earnings of about $33 million on sales of $1.15 billion”not stellar numbers,
Understanding the Numbers

but on target with management™s goals to avert disaster. By 1998, it had be-
come an acquisition target, and its 55 stores became part of Saks, Inc.

When Numbers Lag Performance

One key to the success of the Carson Pirie Scott effort was its ability to
limit an important shortcoming in financial analysis”the fact that the
numbers lag actual performance. For example, the company knew that if
it tracked expenses only at the end of each quarter, it would do so too late
to make a difference.

The financials also can™t answer qualitative questions such as those that
go into the formulation of your company™s vision statement. In addition,
you may well find that your financial statement and balance sheet don™t
address other matters of concern to you. You need to create your own
key indicators to measure your success in quality, market share, or cus-
tomer satisfaction.

If you are puzzled by what the numbers say, find experienced guidance
to help you make the analysis. Sometimes your accountant can help; oth-
erwise, a consultant who has run a company in your industry or a group
of other CEOs or people experienced in business may help you see some-
thing you can™t (or don™t want to) see.


As a business leader, you™ll inevitably face the question of whether to
share information about company finances with your employees and
how much. Progressive managers make it a priority to educate staff on
company finances. They make budgets widely accessible, at least within
the confines of company facilities.

Still, it scares many managers”even progressive ones”to be open with
the financial statements. As a rule, many people feel uneasy sharing
money matters under any circumstances, considering them wholly per-
sonal. Moreover, many companies operate in such competitive fields that
they risk a great deal if they bandy about their financial information.

Although I certainly advocate sharing financial and other key indicator
data with employees, I don™t think it makes sense to give them financial
84 Set High Standards

statements. Financial statements are documents meant for investors and
accountants. Instead, what employees need is data relevant to their jobs.
They also need to have this data analyzed in terms of the trends so that
they can see how their work is impacting the company™s prosperity.

Share numbers with your employees that will initiate clear action, and
prepare and present a short, written analysis of those numbers. It is vital
that each employee see a connection between not only his or her job but
also each individual action and your financials. This will impress on
each employee the fact that in business, virtually every action has a fi-
nancial impact.

Many owners and managers are experts at product costs but ignorant of
everyday, nonspecific business costs. You can hire consultants or profes-
sional staff to study your costs of labor, capital, and the rest, but you still
need a basic approach to these issues. Furthermore, you have to know
how to judge the results of their work.

Financial realities sometimes conflict with your vision and mission
statements. When this happens, you may have to acknowledge the limits
of quantitative analysis. Look to your business plan and vision and mis-
sion statements for guidance in making cost analyses.


To complete the exercises and worksheets in this section, you™ll need:

• Your income statement and balance sheet.

• A list of accounts payable.

• A list of accounts receivable.

You may need to gather other data as well. The worksheets and formu-
las that flow from this information will help you compare projections to
actual sales and expenses through your fiscal year, analyze cash flow,
calculate and analyze various financial ratios, and determine key finan-
cial indicators and other information critical to owners, managers, and

Put together, the worksheets and exercises provide you with useful fi-
nancial tools and the framework for a monthly reporting package that
Understanding the Numbers

will allow you to monitor your company™s performance from many dif-
ferent perspectives and take some appropriate actions.

The worksheets in this section that will help you get a handle on under-
standing the numbers for your company are:

• Year-at-a-glance income statement.

• Year-at-a-glance balance sheet.

• Year-at-a-glance financial analysis.

• Budget variance report.

• Same month last year variance report.

• Analysis of cash position.

• Key financial indicators.

• Financial report to employees.

The following measures will help you to determine where you should be
satisfied with your financial reporting:

• Do you have good cash management?

• Do you have timely and accurate financial data to review?

• Does the data you have help you make decisions? Do you need
more? Do you look at all the data you receive each month?

• Is your company performing well compared to industry standards?

• Do you meet with employees at least once a month to review vari-
ances and trends?
86 Set High Standards


Financial reports done by your accountants are useful for comparing this
year to last year, but they don™t tell you whether there is a big variation
from projection and which month the variation may have occurred. If
there is a large variation in one month, the year-to-date numbers are off
the rest of the year after that point.

The income statement tells you how well your company has done over a
period of time. It shows both revenue and expenses and arrives at a net
income number at the bottom of the page.

Worksheet 3.1 on pages 88“89 synthesizes a number of important numbers
into one form and on just one page. It offers a visual way to look at every-
thing at once, which helps you think about business activities over the
course of a whole year. Large variances should become quickly apparent.

Making It Happen

Using Worksheet 3.1, I find myself better prepared to ask pointed ques-
tions about budget items. I can compare them to other items, even other
budget variances, and research important deviances from what I expected.

Some of these items may result from miscoding and similar technical
problems, however, rather than expenses being much different than ex-
pected, but even glitches become easier to detect when the numbers run
alongside one another.

Enter actual sales and expense numbers each month throughout the
year. Calculate the monthly average column by taking the number of
months so far this year and dividing by that number. This tells you if
your monthly average is over your original budget and whether your cur-
rent month is above or below average.

Reality Check

Consider these questions about your completed worksheet:

• Are your expenses what you expected, or are there large
Understanding the Numbers

• Does each month look comparable, or are there large differences
month to month?

• Do particular items seem out of line with the others in the report?

• Can you see trends that run across your business functions?

• Are there certain budget items that make sense compared against
one another? For example, an increase in direct mail expense, fol-
lowed in a month by a spike in revenue. What do those compar-
isons mean about your business functions?
Worksheet 3.1

Year-at-a-Glance Income Statement
Month Monthly
1 2 3 4 5 6 7 8 9 10 11 12 Total Average
Cost of Goods Sold
Beginning inventory
Materials purchased
Salaries & wages
Production supplies
Temporary help
Shipping supplies
Mailing & shipping
Less ending inventory
Total Costs of Goods Sold
Gross Profit
Sales & Marketing Expenses
Sales commissions
Direct mail
Other sales & marketing
Total Sales & Marketing Expense
Overhead Expenses
Payroll taxes
Group life & health insurance
Workers compensation insurance
Employee benefit plans
Officers™ salaries
Employment expense
Temporary help

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