2020 = Clear Vision

By Steven Denny | January 1, 2020
2020 – my mind immediately conjures up the phrase “hindsight is 2020” every-time I hear the new year exclaimed.  Hindsight of course, refers to the ability to clearly understand a situation or event after it has happened.  At IBA, we use hindsight daily evaluating businesses to get a clear understanding of a businesses history of performance.  This enables us to determine what the business is worth, what the business is capable of producing in profit without any change in revenue, and which direction it is trending.  Starting today, I am consciously making the choice to flip the thought in my head to “2020 = Clear Vision”.

 

Clear Vision

The benefit of hindsight is that it paint’s a picture of the past and provides an indication towards the future. Consider the following business data illustrating it’s history of performance:

 

 

Now let’s take these data points and paint a picture with them:

 

 
This graph illustrates the actual business performance data from the table above.  Each data point is plotted with a dot on the graph.  Then the dots are connected to link them and highlight how they are moving over time.  Finally, we add a trend-line to each data set to see which way the data is heading (i.e. how it will continue to perform in the future without a changing influence).  For this business, what does it tell us?
  • Sales are growing.  At least one of the following is happening:
    • The customers are continuing to trade with the company
    • New customers are being added faster than customers are lost
    • It’s products or services are readily accepted by the marketplace
    • The companies advertising effectiveness is positive, returning a greater return than cost
    • It’s market share is growing 
  • Gross Profit is staying even with Sales, even though it does fluctuate over time.  This could mean:
    • Product mix is changing as customers are growing / added
    • Pricing is being adjusted in conjunction with or shortly after a change in cost is experienced
  • Net Income is declining as revenues increase.  This could mean:
    • Business is adding expenses / overhead faster than the Sales can cover them
    • The working capital requirements are growing faster than profits
    • The owner has little to no controls in place to manage the business as it grows

The picture shows us a clear vision that the Net Income line is crying out for help. Profits are sporadic and not growing with sales and gross margin, an unhealthy condition. Without some sustained corrective action to profits, this business may be in trouble.

This picture starts raising the hair on the back of my neck. To investigate further, I turn to the balance sheet. There I see a more pronounced cry for help. Book value is falling like a rock as the cash position weakens while the debt climbs. This situation is worse than expected and I now see clearly that though the owner projects a calm, confident exterior, he is really desperate for help. His cash position is weak and he struggles to borrow from Peter to pay Paul. More than a cry for help, this is a 911 emergency!

Keep in mind that all of this is taking place in an economy which has delivered the strongest growth of a generation. In fact, the USA is now experiencing the longest uninterrupted expansion cycle in our history.

What we know for sure is that the current economic expansion will not last forever.  A slowdown or a pause in the expansion will come, maybe even a full blown recession.  No business is completely immune from that.  Couple that with this businesses weakening cash-flow and rising debt and a clear vision of imminent danger is apparent.
 

THE BOTTOM LINE  

In 2020, take advantage of hindsight to allow your business performance to illustrate a clear vision of where it is headed.  Have a clear vision about where you want it to go and determine what is necessary to get you there.
 

Start by making sure your business financial information is complete, up-to-date and accurate.  Have a full range of business financial reports at your disposal:  Profit & Loss, Balance Sheets, Cash-flow Statements.  Use the data to paint a picture of what has happened and then project that performance into the future.

Plan for the unexpected – the unexpected slow down, the unexpected expense – anything that could be a hit against the business. Allow yourself some margin – some room so that the unexpected isn’t a knock-out punch.
 

Finally, ask for help where warranted.  The best performer’s are continually engaging coaches who can help them improve to achieve more than they could on their own.  Have a clear vision about your business and it’s future and take the necessary actions to make 2020 your best year yet.

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