This article is the first of five by guest contributor 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

The Internal Exam: Five Areas Where Risk Can Lurk

While numbers in and of themselves are neutral, the way they are interpreted can be misleading. According to a 2002 CFO magazine article, “A full 17% of respondents admitted that their CEOs had pressured them to misrepresent results at least once.”

Without pointing fingers, could your financial statements, projections, and results use a more accurate interpretation?

Besides giving you a more accurate picture of your company’s financial fitness, an accurate understanding will have a major side benefit over the next year. The better you understand your company’s real position, the more accurate the information will be that you depend upon to run your business. Depending upon how they are treated at your company, I’ve identified five areas that can either provide strategic benefits going forward if corrected, or be landmines where risk may be lurking in your company, if ignored.

Let’s make lemonade from lemons, if any of these issues still exist at your company.

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How does your company stack up to these statements?

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1. The Value of Knowing Your Most Profitable Customers

How many times have you asked or been asked some version of this question: If you find out who our 10 most profitable customers
are, could you please let me know?

I can’t tell you how many times I’ve heard top executives ask this question. Like a well-kept family secret, companies often can’t accurately identify their 10 most profitable customers. Some companies may define their top 10 customers in terms of those with the largest revenue. At some point in the company’s history that might have been a reasonable approach. In this case, there are reasonable time frames when the product line does not have to be very wide, customer service issues may be minor, margin erosion has not begun, and even costs of production are reasonably stable.

However, as your business becomes more complicated or more competitive requiring new or more modern software programs and/or incompatible record keeping systems, the business may not have the money to immediately upgrade information systems and must get by for now with what they have. In those cases, I’ve found that accurately knowing the 10 most profitable customers means digging a little deeper to get a better understanding of the numbers.

For example, I once worked with a steel company that had invested in software and hardware systems that could handle high volume manufacturing of a limited number of products with a limited choice of options. When the industry became much more competitive, customers demanded a wider range of customized product options, including color, length, and width.

The more competitive environment meant they needed better operating information to become more cost effective while still meeting new and wider customer demands.

The information systems that worked well in the past could not meet these new customer demands.

The company had not funded investment in new manufacturing systems or new data systems. Normally inside such companies, people solve these problems with unofficial Excel spreadsheets. Excel’s flexibility solves the lack of flexibility inside the official system. After all, customers want their product delivered their way, how they need it, and when they need it, and do not care how the company’s internal information system works.

However, even if the accounting department can deliver the financial statements and reports required by the SEC, management must have the right information to run the business successfully. If this is “offline” in a spreadsheet on a manager’s laptop instead of in “the system,” the information may not be easily accessible or in a format that is easily usable.

Or it may take time and energy to integrate the spreadsheet data with the “online system” data. (Think of the last discussion or meeting you attended where a manager insisted they he or she couldn’t get the information he or she was requesting.)

Whatever the situation, there are clearly more costs associated with both providing the customized services to the client and accessing and presenting the data for management.

Often, the short-term answer is to throw bodies at the problem.
 
Sometimes the mid-range solution is to get the right eight people in a room for a day and see what information is needed and how it can be delivered. That can initiate the process to obtain needed information and help clear red tape for management and their teams. Whatever level of access to this information your company has, I strongly recommend regularly obtaining the information about your most profitable customers. We will examine this issue in more detail in Part 2 in my next article here on the Firestorm Blog. After all, you would be hard pressed to find anyone who disagrees with the statement that customers are the lifeblood of his or her business.
 
 
 
Next week: Part 2 - Question Today the Ongoing Value of Capitalized Items

Gary W. Patterson has more than 30 years of senior management experience with high growth technology, wireless, manufacturing and service companies. He has worked with more than 200 companies — from start-ups to Inc 500 to Fortune 500 — providing high level strategic guidance and expertise. Gary’s financial acumen and extensive business knowledge have brought about significant outcomes for his clients, helping them to successfully navigate that often murky pathway to growth and profitability.

Gary’s extraordinary track record includes building two start-ups (each achieving $10 million in revenue within their first year), diagnosing company oversights to save $150K to $3 million annually; guiding a young company through a liquidity search resulting in $25 million in financing, and; helping a company broaden its client base 525%, increasing revenue from $16 million to $100 million.

He has also negotiated more than 25 M&A transactions with a market value exceeding $390 million and helped several companies reach tenfold compounded annual growth in revenue. His international experience includes serving as the European coordinator for the global enterprise-wide application of an innovative software pilot program for a Fortune 500 company.

Gary holds an MBA in Finance and Operations from the Stanford Graduate School of Business, a BA in Accounting from the University of Mississippi, and is a CPA.