The Statement Of Cash Flows Provides Summary Information About Cash Book Summary – Corporate Canaries – Avoid Business Disasters – Written by Gary Sutton

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Book Summary – Corporate Canaries – Avoid Business Disasters – Written by Gary Sutton

Gary Sutton is a business turnaround expert and this little book is full of great stuff. If you are interested in business or have a business, this book must be on your desk. Use it as a reference for your business desk. I am a big believer in “Inversion” which is the study of opposites of things. If you want to be successful, study success and failure to really understand the full spectrum. Gary’s book outlines 5 major early warning signs similar to blood pressure, insulin levels, cholesterol and heart rate for physical health.

Why is this important to me?

You should consider several reasons that make this book important. Are you employed? If so, you must read this book. Early warning signs will ensure that your company is on solid footing. Enron employees thought their money and pension were safe. As we all know, this was not the case. One of the main principles about the debt would give them the knowledge to make a change before they lose all their pension.

Do you have a business? If so, then you must understand all the principles mentioned in the book. You have a fiduciary responsibility to ensure that your company is healthy for all stakeholders. This is important because they depend on you and these early warning signs are essential to understand so that you can make the necessary changes.

Gary uses his miner grandfather’s advice to outline the top 5 pitfalls to avoid. I’ll focus on 5 without the story, but understand that miners used canaries to detect gas leaks. So if the canary died, they knew they had to evacuate the coal mine. Now we will dive into each of the 5 principles:

1. You Can’t Outgrow Losses – You see time and time again where short-term, Wall Street-conscious companies focus on top-line growth without regard for profits. This is a bad idea. Merging two mediocre companies that have top growth just makes one big average company that will bleed money.

Early warning signs are:

1.) If the company’s revenues grew at twice the rate of net profit over three years

2.) Sales staff are hired according to volume, regardless of profit.

3.) Hallway conversations are about sales, not earnings.

2. Debt is a killer – this is a nebulous one, but Gary gives a great indicator of when debt is too much. If you’ve seen any of my other recaps, then you know I’m a big fan of OPM (Other People’s Money) for leveraging good debt to buy cash flow assets. Plus, too much debt can kill you in bad times.

Early warning signs are:

1.) Debt to equity exceeds 1:1

2.) Equipment is always leased, never purchased

3.) Executives spend more time with bankers than with clients.

3. Fools fly blind – this has to do with financial controls. When these are sloppy then no one knows where the work really is. This is a killer because it takes too long to distribute operational P&Ls or worse they don’t even use them as tools. Also, when larger companies focus on revenue and earnings per share, but have no idea if they have enough cash to cover payroll.

Early warning signs are:

1.) Audit adjustments at the end of the year amount to more than 1% of revenue or 5% of earnings.

2) Books are not closed within two weeks of the end of the month.

3.) When you ask employees where the company makes the most profit, no one knows.

4.) No leading indicators for sales.

4. Any decision is better than no decision – “analysis paralysis” kills innovation and speed. These two factors separate the market leaders from everyone else. When people are afraid to make decisions or spend too much time covering their own asses, it reveals deeper problems in the company and poor leadership. These behaviors create bureaucracy, inefficiency and ineffectiveness. See my summary of how the wise choose to overcome this bad behavior.

Early warning signs:

1) A mission statement tries to say many things to many people (wishy-washy)

2) Titles of brochures and advertisements do not offer concrete and significant benefits to customers

3) Employees, customers and suppliers give different answers to the question of what the company does best. Leadership failed. Disreputable companies die.

5. Markets rise and markets die – business leaders must recognize when markets are dying. If they don’t, reinvestment yields “diminishing returns.” Basically this means that the company will die of a thousand cuts. In Good to Great, Jim Collins describes Kimberly Clarke’s entry into the consumer paper business and exit from their traditional business. They had to sell the mills. This was a big decision that worked, but it can be very difficult because you have an established business that brings in money. I can confirm #5 because it happened in my business. We’ve had to reinvent ourselves twice in the 14 years I’ve been working on it. There are types of business that are more successful and easier than others. This is worth studying in its own right, and I will be profiling business types in future summaries.

Early warning signs:

1) Sales have fallen two years in a row.

2) Competitors’ sales have fallen two years in a row.

3) Nobody makes money.

In short, Corporate Canaries is a must-read book. The lessons are crucial if you’re trying to build a business, and the lessons can be transferred to your personal finances as well.

I hope you found this short video summary useful. The key to any new idea is to incorporate it into your daily routine until it becomes a habit. Habits are formed in just 21 days.

One thing you can take away from this book is to keep your debt to equity below 1:1. This is difficult for most people because they have debt and no equity. Through daily discipline and simple daily changes, this can be easily changed.

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