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This article is the fourth of five by Firestorm Expert Council member Gary W. Patterson exploring the Five Key Areas where Risk may be lurking in your company, an excerpt from his book Stick Out Your Balance Sheet and Cough
Review Part 1 and take the Internal Exam Survey:
Review Part 3: When Your #1 Customer Loses Profitability – Risk Management - Part 3 of 5
Has your CEO, CFO, or financial department ever mentioned that the company has to keep losing money on a branch, service, or product because it can’t afford the financial loss it would have to record to dispose of the asset? I’ve been privy to such discussions many times in corporations of all sizes. What happened to companies in those circumstances is that they either did not fully understand the real value of their assets, or they chose to look at their assets through rose-colored glasses.
A smaller-scale version of this situation occurs when a business fails to look at return on equity related to assets or departments. Many companies have one or more assets that can be associated with a band-aid solution or assets that should be sold (even at a loss) and reinvested in another opportunity. This can be particularly true when the executive bonuses are mainly a function of the absolute dollar level of profitability, with limited influence from return on equity or similar measurements.
Let’s use our “magic decoder ring” on a statement all too often heard. You (another person or company) would be better off selling stock, the asset, or even in some cases, the company, and just putting the money in treasury bills. In fact, I know of a situation where the subsidiaries of a holding company earned 2% on equity when the prime rate was 4%.
After viewing the chart, compare your business. Then ask, What situation or valuation in our company are we looking at through rose-colored glasses? A similar area where you might look for the rose-colored glasses within your company is your capital expenditures program (CAPEX). For those of you who are saying your company has a mechanism that investment proposals meet threshold rates, how often does someone report back convincingly that the actual investment return met or exceeded the level projected to get the funding? I suspect the answer is not as often as you think!
Next week Part 5: My Business Paints an Overly Optimistic Picture to Our Customers, Vendors or Finance Sources
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Firestorm founders Harry Rhulen and Jim Satterfield wrote Disaster Ready People for a Disaster Ready America specifically to address the need for crisis and disaster preparedness at home, and the book has become a cornerstone of many personal and corporate preparedness programs.