A rear view mirror is not enough

by with Comments Off on A rear view mirror is not enough
March 21, 2016

rearviewmirrorDecision makers in businesses on the move must look forward, and financial accounts and other traditional information tools tend to look at history. Useful, perhaps, but not sufficient.

 

It was said that if you were in the same race as Ayrton Senna, your mirrors were vital, because if he was behind you, he was lapping you, and you had a choice: get out of his way or crash; nothing would stop him coming through. In today’s fast pace business climate, the people driving companies the threats and challenges are in front.. Yet much traditional business information such as management accounting, looks backwards, at history. Worse, these take time to prepare, making them a view of what happened a while ago, not a clear sight of what you must navigate now.

 

Of course it’s important to look back at what’s been achieved and what hasn’t, and understand what problems might lie in store as a result. Management accounts are crucial to highlight the underlying financial health of the business. A comparison of performance against a budget or plan can be informative, too. However, in a fast changing world, these things may not be helpful in devising the right response to what’s going on now or what’s about to happen. How we did last month against a plan we set several months ago may just have been eclipsed by changes in the marketplace.

 

So what can underpin up-to-the minute decision making for the Board? For most technology companies, life revolves around three things: cash, sales, and the competition. Market intelligence that continually refreshed is vital for any business attempting something new. Gone are the days when you could make a living by solving yesterday’s problems tomorrow, yet many still fall into that trap. Sometimes, this is driven by introspective technologists not being complemented in management teams by those more market facing. A management team that’s underweight in skills and knowledge of the market is an immediate red flag. As I’ve argued elsewhere, investors must be finely tuned to market trends if they are to make money amid the kinds of abrupt changes taking place today.

 

Everyone needs to understand forward cashflow, simply because it will kill you if you get it wrong. You can be growing and profitable, but if you’ve run out of cash you’re done for. Worse, if there’s a cash problem ahead, almost any solution will take time, so a forward projection is vital, and must go out far enough to identify problems while there’s still time to fix them. My rule of thumb is that the barest minimum is four months, and this is tight in all but exceptional circumstances.

 

Of course in most technology businesses, the biggest input to a cash projection is the sales forecast. It astonishes me that so few businesses understand their own sales pipeline, and without a hard-nosed understanding of what prospects there really are, the cash projection is flawed, and Management is flying blind.

 

In most growing companies, the forward cashflow will be a relatively simple spreadsheet with few complications. The challenge lies in the quality of information about forward sales. This information and the view of the competitive and other market threats, are seen in the windscreen, not the rear view mirror.

Comments are closed.