Halloween's Over- SuperFreakonomics in Business
Halloween is over, but the tricks may not be done. A hot book now is SuperFreakonomics, which points out incredible behaviors backed up by economic validation.
Business can have some incredible numbers. Owners trying hard with good intentions and up to that point have been told they were doing OK have been floored to find results were very different than expected. Among examples I have seen:
- After one week on the job as CFO, I told the pharmaceutical firm they had lost 9 times more than they thought, even losing more than they had in sales, and being weeks away from bankruptcy.
- When called in to help with a bad matter problem at a rapidly growing early stage telecom company, I told them the bad debts were really running 55% of sales, not 15%.
- In two thirds of the consulting clients I have had over the past 17 years, I have found material restatements of the financials. They weren't doing as well as they thought.
- In the past year, several owners have been surprised by their banks. Even though they had been with the bank for many years, the bank has told them the bank is no longer renewing their line, sending the owner out in the market in the worst banking environment since the Great Depression. Even if they do get renewed, there are new fees, tighter covenants, floor on interest rates and higher rates in most cases.
- Cash flow forecasts are often way off the mark, catching the owner by surprise with a cash squeeze. While they could lean on the bank to close the gap, that door is often shut now.
- Working capital is not worth what it used to be. Uncollectible receivables and obsolete or below market inventory is piling up. Bank appraisals have been coming in much lower, cutting down availability on revolvers.
- Margins can be very different than expected. Often costs are left out. Even if captured OK overall, margins can be misallocated. That customer or product line you thought was a star may be very unprofitable.
Now more than ever, it is critical to make sure your numbers are on solid ground. Don't take anything for granted. Don't rely on your usual monthly write-up work or annual review by your outside accountant. Have someone do a deep dive like never before.
Comments