A Company’s Financial Statements Tell an Important Story … Can Management Successfully Communicate That Story?

I.          Introduction

    

 

            The Key to a Company’s Survival … Sustainable Free Cash Flow & The Discipline of Financial Performance

 

At this time, company management is asking itself the obvious critical question: “what can we do going forward to maximize the company’s ability to weather this downturn and to thrive in better times?”  The not-so-obvious answer to this question is that the company should focus on achieving sustainable free cash flow.  A company can achieve sustainable free cash flow if it commits to and properly executes the discipline of financial performance (explained below). 

 

            Sustainable Free Cash Flow To Satisfy Banks’ Heightened Lending Standards

 

A company’s survival, let alone success, is tied largely to the ability to manage cash flow.  No doubt this axiom will be tested and reproved in spades as the current global financial and economic maelstrom runs its course.  Arguably, companies have a greater ability to increase cash flow from operations than they do from financing activities.  A company can, for example, take action to collect accounts receivable and improve inventory turnover (operations), but companies cannot force banks to loan money (financing).

 

 

 

II.        The Discipline of Financial Performance

 

            A Company’s Performance Gap (Gross Potential – Current Performance)

 

            “Gross potential” is a financial metric that can derived by management effectively communicating a company’s leading indicators or core competencies (read: how well a company can do). A powerful example of a core competency which is often neglected is what we call “common knowledge” which is founded on the principal that knowledge is power but if critical business knowledge is housed within select organizational functions automatically restricts the “knowledge power”. This common knowledge can be segmented into

• Business strategy knowledge
• Process knowledge
• Information access capabilities
• Policy knowledge
• Measurement and expectation knowledge
• Financial performance knowledge.

 

The greater the degree of common knowledge throughout the organization the more effective the business is in getting things done the right way. Creating a systemic way to maximize common knowledge is a critical foundation to all core competency development or enhancement and thus reducing the “blind spot risk”.

 

(Note:  The process for management’s communication of financial statements is discussed below.)  Financial statements, however, are a lagging indicator of a company’s current performance (read: how well a company is doing).  They essentially paint a backward-looking picture based on a company’s financial and operating performance during the most recent fiscal period.  The “performance gap” represents the difference between a company’s gross potential and its current performance. 

 

The Root Causes of the Performance Gap: A Company’s Organizational Blind Spot & Absence of Standardization in Financial Statement Analysis and Interpretation

 

The performance gap is attributable largely to a company’s organizational blind spot.  This organizational blind sport is rooted in the common practice (in many companies) of allocating management responsibilities among several individuals.  As a result, more often than not, senior managers:

 

·         cannot understand, individually, in any transparent manner how each of a company’s individual operational segments impact on the company’s aggregate financial and operational performance, and

·         do not have a clear understanding of how a company’s financial statements (i.e., balance sheet, income statement and statement of cash flows) interrelate with and impact on one another.   

 

There is no standardized way to analyze and interpret a company’s financial statements to communicate the company’s gross potential.  The absence of standardized financial communication tools, in turn, has, among other things, two notable adverse effects on a company:

 

·         it compounds the challenges of a company’s organizational blind spot fundamentally; and

·         it impairs management’s ability to gauge a company’s performance gap and to therefore develop and implement strategies (that would increase its profitability, cash flow and return on investment) to achieve financial performance.

 

To this point, in identifying a company’s organizational blind spot and performance gap we have (so-to-speak) diagnosed the problem.  Now we must now turn to the all-important next step – the solution – the roadmap for company management to overcome the organization blind spot and to achieve the company’s gross potential.

 

III.       The Discipline (of Financial Performance) to Achieve Gross Potential

 

Interactive Real-Time Financial Management Communication – The Performance Gap Cure

 

            At its core, the discipline of financial performance is about two things:

 

·         a powerful organizational learning platform that connects management to the company’s financial statements; and

·         company management (via this platform and connection) interactively and in real-time communicating the company’s financial statements to make optimal business and operational decisions.

 

In order to be effective, this organizational learning platform must include the following fundamental components:

 

·         relevance – people connect to learning that will enhance their ability to perform and their career;

·         real-time feedback – instantaneous feedback on potential strategic decisions;

·         interactivity – simulation of hypothetical scenarios without consequences, which promotes creativity and innovation;

·         simplicity – delivery of complex material and information easily understandable format;

·         familiarity – personalization through the use of a company’s current financial information.

 

The interactive and real-time communication of the company’s financial statements will, for example, significantly improve management’s ability to evaluate whether a strategic decision to create or destroy cash or reduce corporate waste.

Global Financial Bridge, LLC and the One-Page Scorecard

 

Global Financial Bridge, LLC has created such a platform in the form of a one-page scorecard (illustrated below), which among other things:

 

·         transforms a company’s standard financial statements into an integrated environment, and communicates all of the financial statement components in a single platform; 

·         provides for interactivity and real-time feedback through calculation and analysis of robust what-if scenarios and stress testing capabilities; and

·         incorporates a net change capability that isolates the financial impact of a strategic alternatives (or alternatives) and illustrates simply how the income statement, balance sheet and cash statement changed and what the drivers created the change.

 

In our experience, those companies that have truly committed to and properly executed the discipline of financial performance have overcome successfully their respective organizational blind spots and performance gaps and achieved their gross potential.