By Richard Tyson
It’s not clear whether 2020 was a wake-up call or if it put us all to sleep. The worldwide pandemic caught everyone by surprise, forcing us to reassess how we interact with each other and how we conduct business. For some, this was a call to action; for others, it seemed to usher in a year of fear and uncertainty that froze them in place.
Now that we’re well into 2021, it seems incumbent on us to firm up our strategies for moving forward. In each of our enterprises, we need to realign ourselves with our purposes, the value propositions we offer to our customers and the values that govern our actions. This alignment sets the stage for execution, for how we lead our teams and what we do every day.
All of this must be done, of course, in the context of making money and growing the value of our businesses. For many enterprises, this is where we’ve lost our way in 2020. Companies that were financially stable for years found that the “new normal” didn’t provide the profits and cash they required. Many couldn’t adapt and ultimately went out of business.
As we work with CEOs and business owners today, we recognize that for many, the most pressing need is to stop the metaphorical bleeding of 2020 — to get them financially stable. As much as that is a numbers game, it is also a psychological challenge. Much of the confidence in traditional strategies has been shattered. While there is still merit in some of the standard answers, it is more essential than ever to customize solutions for each company and leader.
Your customized solutions will begin to emerge with a candid assessment of where you are right now. That means taking an honest, critical look at three financial documents: your most current income statement (P&L), balance sheet and cash flow statement. Simply put, you can’t solve a problem if you don’t accurately recognize its characteristics, its dimensions and its severity.
There are four critical questions that you should consider here:
1. Do you understand your financial statements? Many, if not most, CEOs are not trained in accounting and finance. If you don’t understand your financials, please invest in becoming financially literate.
2. Do you trust the numbers? Are they up to date? Can those who prepare them give you the answers you need?
3. What do your financials tell you about your current profitability, cash position and value? Each financial statement tells a story, and more than anyone else, you should know what that story is.
4. What are your options for bringing about the greatest positive outcomes, both short-term and long-term? How will you lead for future success?
This process will not stray too far from the numbers, but it begins with the psychology. You must begin to realize that you can win this game! But this will only happen if, after acknowledging where you are, you begin to develop an action plan.
When company finances are tight, it is likely that you will put a heavy focus on improving the efficiencies of your business. This typically involves greater attention to budgeting, eliminating as much waste as possible in your operating processes. While this is wise, recognize the tradeoffs between efficiency and effectiveness.
An example might be increasing your efforts on collecting accounts receivable. Not a bad idea — up to a point. While this enhances cash flow, too much intensity here may drive away customers who have also struggled in 2020. Effectiveness may demand that you moderate some of your efforts in increasing A/R efficiency.
Early in my career, I was a product manager for a Fortune 100 company. They placed heavy emphasis on manufacturing productivity. While I couldn’t argue with the importance of the efficiencies they were seeking, I had a different concern. The products that were in highest demand with my customers were constantly backordered. My customers were becoming angry, and some were turning to my competitors. This led me to question our factory folks: Why couldn’t they keep my most important products in stock?
After some investigation, the answer became clear. Our high- demand products were not the most efficient to produce. Long, efficient runs of other products were given priority over what our customers wanted. We were sacrificing effectiveness (serving our customers) for efficiency. The long-term ramifications of this would have been lost market share and profits, as well as a negative effect on company cash flow as we stockpiled huge quantities of very efficiently manufactured products that were not in high demand.
This is a time to reset, to put the fears and concerns of 2020 behind you. You need to believe that you can do this, then assess where you are, why you are there and develop plans to make this year — and the years to come — much more fruitful and prosperous.
Richard Tyson is the founder, principal owner and president of CEObuilder, which provides forums for consulting and coaching to executives in small businesses.