Why do they still do this ? - when it has been well-documented and well-proven for many decades that less is most definitely more in this particular regard

A relevant case study

The Background - A building contracting firm which had been growing steadily for approx. twenty years from a stone-cold standing start, and with a turnover of approx. £6m, and with approx. 60 staff, had not ever over that whole period made any significant Pre-Tax Net profits, nor had it ever generated any significant Net Cash, and it was now suffering serious long-term problems - and danger - as a result 

The Owner / Founder / Chairman / CEO, who had done an absolutely amazing job in starting and building this significant enterprise, found himself, even before the recession, in on-going cash flow / working capital difficulties year after year

The problem – When it came to matters of budgeting / financial planning / monthly management accounting, the said CEO over-rode continuously the advice of his fellow directors, (both of whom were full-time executive Operations directors), and similarly of his internal book keeper, and of his internal accountant, and of his external accountant professional advisers, primarily on the (private) basis that he quite simply could not understand / take in all the massive amount of overly- fine detail which was to be found within their Budgeting figures, and within their monthly Management Accounts, in the form in which those were being presented to him

His contention was quite simply that if he was hitting his significant sales turnover growth aspirations every year, which he was, in spades, and if he was hitting his accurate industry-standard Gross Margin aspirations every year, which he was, then therefore everything would be / should in his view be abs hunky-dory, given that his Fixed Overheads were under control, which he believed them to be

Truth be told, whilst he was not by any means a financial illiterate, he was being presented with budgeting financial models and monthly management accounts from his internal accountant which were wildly over-lengthy and massively over-complex, the budgeting document alone having fourteen sets of spread sheets, and with some of those fourteen spread sheets running individually to ten and often more sub-spread sheets !

At the point at which OMSG Non Exec Group were asked to assist, the firm was having very real difficulty in paying its weekly and monthly wages and salaries, and similarly in paying its key suppliers monthly, notwithstanding the fact that it had in place considerable facilities from its bankers. At that said point, the bank had though said that enough was enough, and that they were not prepared to assist any further, beyond their then-existing commitment

The analysis-It took little time for the appointed OMSG Group Non Exec, working in close consultation with the Internal Accountant and with the CEO and the two Operations Directors, to establish and agree that the content of the massively over-complex Fixed Overhead listings and calculations was the key underlying issue, and which was warranting lengthy careful and thoughtful attention -  Also that there were indeed no hidden problems with the Sales Turnover figures and the % GP Margins   

The action - The OMSG Non Exec generated speedily a hugely-simplified – and just one page - second-stage Budgeting / Financial Modelling tool, driven directly from the many dozens of pages of the original Budget as presented by the Internal Accountant, (this latter document from the Internal Accountant then taking up the role of just being background supporting documentation) -  and which said new one page budgeting / financial planning and modelling tool could be understood easily and quickly and fully by all members of the Senior Management Team,  including the CEO, and from which they could all make sensible truly-informed and focused management and planning decisions

A similar process was then undertaken with the Monthly Management Accounting / Financial Performance-Monitoring processes, whereby once again the info in many dozens of pages was reduced to being presented in just two pages each month – One covering monthly and YTD P & L analyses, and the other covering monthly Balance Sheet analysis    

The outcome - The CEO appreciated, for the first time, that his Fixed Overheads were not truly under control, as every year the Sales Turnover rose steadily, as did the £ Gross Margin in line with the unchanging % age, but that the budgeted Fixed Overheads figure each year was never actually achieved, and over-shot time after time, due to both new unbudgeted expenditure being committed, and to significant overshoots arising within agreed budget cost lines

The new simplified, but truly informative, budgeting / financial modelling tools – and similar monthly management accounting / performance-monitoring tools - which he and his team now had at their disposal, courtesy of the OMSG Group Non Exec, proved to be invaluable in focusing the attention of the CEO and that of his senior management team on to just the (very few) absolutely key numbers - for the first time in twenty years !

It was therefore agreed that the said massive focus should now be targeted on stabilising and fixing extremely accurately and strictly, and then monitoring ferociously monthly with the OMSG Group Non Exec, the Fixed Overhead figures as budgeted. Also agreeing on there being in future Nil new unbudgeted expenditure being committed, and to Nil overshoots within agreed budget cost lines, and to Nil Capitalisation and Depreciation – Not that is without the prior minuted agreement of the whole senior management, and including the OMSG Group Non Exec !  

The moral of this story / case study - Having a strong-minded, independent detached objective and highly-experienced and expertised Non Exec on board right from the very beginning / many years earlier could and would have made all the difference to the MD and his fellow directors, and to their business, and to their peace of mind !

This in order to be able to be analysing with them clearly and speedily the detailed nuts and bolts of all of the perceived problems and opportunities

And, to be discussing and examining with them - and validating and proving appropriately - the relevant and workable alternative strategies and tactics with which to deal successfully with those problems

And for the said OMSG Non Exec to be willing to commit to stay with and support the client firm and all of its people throughout the whole of the three or four years involved, to be planning with them and then supporting them through the various implementation stages of the changes which had been jointly discussed and agreed, and to then be working with them to be growing the business strongly and safely for the medium and long term

And, Yes, we would say that wouldn’t we ! – but it is all very true, nonetheless

More next month, with another case study reflecting a topical issue for SME businesses

April 2011