Executive Success: Chasing revenue can be risky

Financial reporting needs to reveal not just the past, but also the coming months, says David Webb. Photo / Dean Purcell

Income fixation can obscure the impact on longer-term profit, says business adviser.

Seven years on from the global economic meltdown, New Zealand businesses are quietly optimistic, but the tide can turn quickly, warns an insolvency expert.

And when that happens, those who don't have a plan can be left high and dry.

New Zealand managing partner at PPB Advisory, David Webb, says businesses on the whole are faring well - his own practice is proof of that, with demand coming from advisory, rather than insolvency work - but companies are seizing growth opportunities without weighing up the costs.

A typical example would be a business that has seen a few competitors go under, creating opportunities to sign on new clients, says Webb.

"They would like to pick up those customer contracts but don't have the working capital to ramp up to do it.

"Or they get an opportunity for a large customer; they take it but haven't worked out whether that is part of their overall business strategy.

"So we're seeing a number of businesses at the moment grabbing hold of what they can to try and, I wouldn't say turn themselves around, but to perhaps go to that next level."

"Sustainable growth" is a term that pops up frequently in discussions with clients and banks, he says.

"Growth is good but it needs to be sustainable growth."

Having spent the best part of two decades sorting out businesses that have gone to the wall, Webb is well placed to describe the path to failure.

Commonly, the talks he is having with businesses are about understanding what their strategy is, helping them work out their working capital position, what money is needed to pay for new business opportunities and who will provide that funding.

He is seeing a return to business owners and executives focusing solely on revenue.

"They'll tell you they've just doubled their revenue; they've just secured this new contract which will add 'x' number of dollars on their top line and it may seem quite basic, but this is the stuff that we saw several years ago before businesses started struggling again.

"People talking about that growth but not actually talking about what the cash impact is, what the timing of the cash that you need is and also whether it's profitable."

Webb recalls a conversation last year with a client who was excited about the prospect of a new contract that would double his revenue.

Webb quizzed him about the contract's profitability - he was assured it was - and asked to see the analysis that had been done before the contract was signed.

"And there hadn't been any.

"It was that excitement around the big number."

Webb says a lot can come down to accurate financial reporting, whether that's a finance director or CFO, or simply a good financial controller or financial accountant if you're a smaller business.

"But the person who heads up that area, irrespective of size, needs to have strong reporting skills - and not just taxation accounts but actual management accounts that don't tell you as a business owner how you went last month, but actually tell you what the next few months look like."

He says the disparity between the good operators and the small percentage that are struggling is often due to the lack of a strong finance function.

It's where PPB Advisory will often step in, taking up the financial reins to get things back on track, with the eventual aim of moving out of the business.

"We are in there, we are performing a role that, apart from the one-off piece, someone in the team should be doing."

Webb says business failure is not always down to poor management but sometimes just a case of macro-economic factors at play, but by putting your hand up early and asking for help you will gain funders' and creditors' support.

It doesn't always mean getting on the phone to an advisory firm, he says.

"This might sound unique; that I'm trying to talk us out of business, [but] actually going and having a chat to other business owners."

He says one thing he noticed after 10 years working in Australia was that business owners there were quicker to put their hand up for help rather than relying on the "she'll be right" attitude prevalent here.

Aside from seeking help early, Webb has three things he'd like business owners and executives to focus on this year.

He says the first step is to get a good grip on what is happening in the business currently, which includes preparing a 12-month forecast.

His next step is for executives to work out where they want to take their business - a strategic plan. Finally, businesses need to work out how they're going to achieve that plan - everything from funding to making sure they have the right staff.

"If you can't get through one of those hurdles then you don't go any further.

"If it's going to be a struggle then work out whether you are prepared for that struggle or do you just need to consolidate."

Three key questions

• What's happening in the business, and what is the
12-month forecast?
• Where do you want the business to go?
• What are you going to need to get there?