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Vol. 75: Don’t gamble with your balance sheet!

You can’t sustain excellence without business finance

“There comes a moment when you have to stop revving up the car and shove it into gear.”  — David Mahoney

“Cheery little column,” my editor said recently when he read of the rampage of Pestilence and War, the first two horsemen of the Apocalypse. Yet, it’s no exaggeration that middle market business leaders pay little attention to business finance. You may say that’s not true – “I look at my monthly financial statements” … “I know what they say” … “We’re on top of things.” Maybe, but I have seen little evidence that executives have worked nearly as hard to unleash the power of business finance as they have to learn more about marketing programs or social media or lean manufacturing techniques.

If your first inclination is to run toward the exits when business finance is mentioned, it’s only because you’ve been led to believe that these principles are understandable only by seasoned and studied financial professionals. Hogwash.

Yes, you’ll have to devote some time and attention to it, but these principles are very accessible and you can learn them, certainly well enough to work closely with your financial team to make sure everyone’s paying attention to the right things. If you’re going to be a successful business executive, you can’t ignore these principles … and if you keep reading, you’ll see that I’m willing to help you.

Why does the Third Horseman of the Apocalypse ride a Black Horse?

So, yes, the Four Horsemen are still tearing across the landscape. Last time, I noted that there are four occasions when the lack of attention to business finance slaps us upside the head, too late, of course. Pestilence bears the plague of unexpected cash shortfalls that often appear just before payroll is due. War breaks out when you’re trying to grow without adequate cash resources.

… it’s a famine of great proportion when you can’t access external financing resources.

The Black Horse travels in third position among the Horsemen, representing Famine, and it’s a famine of great proportion when you can’t access external financing resources.

For our purposes, we’re mostly talking about bank financing, although in some cases, outside equity financing may be required. Even if the carnage wrought by Pestilence and War drives your soldiers to the battlements, somebody still needs to plow the fields. Famine intensifies the plague because the company can’t access outside financing, which often results from inattention in another area … that dastardly balance sheet.

I understand the P&L. Do I really need to understand the balance sheet, too?

Most business owners spend about 85 percent of their time on the income statement and pay little attention to the balance sheet. They understand the concept of the P&L – revenues come in, expenses go out, profits are left over – but where they’ve gone and why they don’t result in an equivalent amount of cash or net worth on the balance sheet  is a riddle wrapped in a mystery inside an enigma for most executives.

So, it’s exasperating when your banker asks about the balance sheet because for most executives, the importance of debt coverage, or debt/equity and liquidity ratios, is bewildering. What do they mean? Doesn’t most everything happen on the P&L and the balance sheet is just the result of that activity?  (Is that why the horseman astride the black stallion carries balancing scales?)

You have more control over the balance sheet than the P&L

Savvy financial folks understand that you have more control over your balance sheet than your income statement. They also understand that cash flow is generated primarily by changes on the balance sheet, and managing it is one key to accessing the credit facilities required to fuel your plans.

It’s surprising how many companies suffer paroxysms of pain in their gut when they get that unwelcome phone call from their banker. Why don’t more companies pay closer attention to their bank covenants and call their banker when they see that a potential default is on the horizon to work out an appropriate arrangement? Most bankers appreciate that their borrower is paying attention and will work overtime to be accommodating. Of course, if Pestilence hasn’t inspired the cash flow forecasting that will prevent the deathly plague, you won’t see the default coming and the Famine could finish you off.

Yes, the Fourth Horseman riding the Pale Horse is just over the horizon

Maybe I’m being a bit dramatic but not by much. I see this every day. I’m thrilled when I see a business paying close attention to these principles and I’m happy to call many of them clients. But I’m equally frustrated to see so many good businesses with a solid value proposition struggle because they haven’t paid enough attention to the core principles of business finance.

Oh, how I wish the Black Horse was the last of its kind, but alas, the Pale Horse is bringing up the rear, as we’ll examine next time. In the meantime, don’t sail past the last exit before Armageddon. Pull over and make sure you’re incorporating finance into your everyday business decision-making.

(P.S. I’m willing to help you advance your business finance experience … at no cost and with no obligation. Be one of the first 5 business owners to comment on this post and we’ll provide a FREE Business Ferret 5-Year Analysis … AND spend an hour in an online meeting with you to help you understand the specific strategic finance concepts that apply to your business.)

KBO.

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Lary Kirchenbauer is the president of Exkalibur Advisors, Inc., providing practical business strategies for family and other privately owned businesses in the middle market. Exkalibur works closely with senior executives and their businesses at the intersection of leadership and business strategy and uses the Business Ferret™ framework to help companies use strategic finance to drive improved business performance. Lary also hosts the Exkalibur Leadership Forum for leaders of middle market companies in the North Bay. Please visit www.Exkalibur.com for a library of valuable resources, articles and insights or join the Exkalibur fan page on Facebook.

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The North Bay Business Journal, a publication of the New York Times, is a weekly business newspaper which I have served as a regular columnist for about three years. The Business Journal covers the North Bay area of San Francisco – from the Golden Gate bridge north, including the Wine Country of Sonoma and Napa counties.

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Article published – October 25, 2010: The electronic version of this article, as published by the North Bay Business Journal, may be found here. ******************************

Any related materials or articles referenced in the published column, or otherwise applicable, are referenced in this digital version of the article.

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