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Vol. 76: Don’t let the Pale Horse trample your rose garden!

“He uses statistics as a drunken man uses lamp posts … for support rather than illumination.” – Andrew Lang

Imagine that after the first Three Horsemen of the Apocalypse have stomped through your rose garden, you remember that there’s still one more untamed stallion just behind, the trailing companion of Pestilence, War and Famine that have already intercepted your plans for world domination.

The First Three Horsemen of the Apocalypse wreak havoc

As we’ve seen, the first Three Horsemen signify the destructive forces that can wreak havoc in our businesses from our failure to pay attention to the principles of business finance. Pestilence represents the sudden and unexpected lack of cash that often appears just before payroll is due. It is War when we struggle to grow because of a lack of financial resources. Famine lays waste to our plans when there is a lack of access to outside financing.

Most business owners pay little attention to whether they’re actually creating or destroying value each year.

Yes, this is a dramatic re-enactment of the apocalyptic metaphor, but it will serve its purpose if it incites you to implement sound principles of business finance, the only effective weapon to defeat these forces. In future columns, we will consider very specific steps to achieve command and control over your financial performance so that these forces don’t get a foothold in your business.

The Pale Horse may be the most destructive

The Pale Horse is the final member of the Four Horsemen and brings what may be the most destructive force of them all … the recognition that you haven’t created much value in your business after all. The Pale Horse appears when you go to sell or otherwise transfer your ownership interest and, too late, realize your many years of hard work and dedication have not resulted in the value you expected. This is the Death that sits astride the Pale Horse.

There’s a pervasive sense among many businessmen that value creation is synonymous with profitability or revenue size or market share or some simple metric that is easily measurable. Most business owners are easy prey for seat-of-the-pants yardsticks to measure the value of their company. They’re quick to embrace a multiple of EBITDA or revenue or net income as a handy measure of value without taking into account any of the additional variables that really apply.

Are you creating or destroying value each year?

More importantly, most business owners pay little attention along the way to whether they’re actually creating or destroying value each year. They ignore their return on assets, rarely compare it to their cost of capital and never evaluate whether the return on the assets in which they’ve invested exceeds the cost to acquire them. They have unrealistic expectations founded on scuttlebutt, Internet chatter and a perverse resistance to address financial reality.

Valuation is a complex subject, certainly more art than science, and I’ve written about it regularly in this column. You don’t need to spend a lot of money every year for a formal valuation, but you should become familiar with the industry and performance metrics that are used by M&A professionals. There are lawyers, accountants, valuation experts and transaction specialists in this group who regularly study industry standards and performance metrics that apply to the sale or other transition of a business.

Figuring out your business value when you go to sell it? Too late!

The Pale Horse rears its head when a business owner suddenly finds himself scrambling for a financial or valuation expert to wrench an acceptable value from the clutches of poor historical performance. Be sure you’re on top of this value creation process so you understand – every year – if you’re creating or destroying value so that you don’t see the shadow of the Pale Horse crossing your vision.

So, we’ve completed the journey of the Four Horsemen. Cash shortfalls, limited financial resources, lack of outside funding and value destruction have romped across the countryside during the last 24 brutal months. But these dark forces can be harnessed by implementing practical financial strategies to make sure you vigorously monitor cash flow, understand your balance sheet and adhere to a rigorous forecasting process so you have a framework within which you can adjust as your business changes.

It’s not rocket surgery. You can learn these important principles!

Finally, let me remind you … again … that while you may have been convinced that business finance principles are understandable only by seasoned and studied financial professionals, don’t believe it. You can learn these principles well enough to collaborate with your financial team to make sure everyone’s paying attention to the right things and that you’ve created an impregnable fortress that will repel the Four Horsemen.

You can make a lot of progress by devoting just a little bit of time every week to your financial performance. Become conversant with these basic principles and get help if you need it. The fundamental principles of business finance are your best defense against the onslaught of the Four Horsemen, and they are fully within your control.

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 in the wine and other industries, and 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 connect on Twitter or 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 – November 8, 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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