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Berkonomics

No negative surprises! Be first to warn of shortfalls.

In past insights, we’ve explored data gathering and dashboards for tracking the most important information to manage your company. Every good executive has a set of critical data points that best alert him or her to the changes in the flow of business most important to note and in many cases to curb a negative trend early in the game.

There is a truism you should internalize: Most all big problems start off as small problems.  We’ll call this the “rule of excursions.”  Small deviations from the trend or norm if unchecked often become much larger over time.  A missed cash discount by your accounting department probably means that cash flow is getting tighter.  Are receivables collections slowing?  If so, is it one critical customer or a trend?  Is it time to focus more resources upon collections, credit research, or even time to “fire some customers” who continually break your rules or take up too much of your resources?

Whatever the problem, the person or board to whom you report does not want to hear about it after it has become a threat to the enterprise.  If you are the head of sales and the pipeline is emptying or sales have slowed for any sustained period, the red flag must be raised, even if the focus is on you as a result and not upon the problem when the news is first delivered. And if you’re the CEO, your board definitely does not want to hear that revenues are about to fall through the floor because bookings for the past two periods have been so far below forecast.

[Email readers, continue here…]  An alert does not have to be too detailed or too long.   It should be sent to your superiors (and everyone has one or more) quickly, often with a short “and we are working on finding the cause and redoubling our efforts.”  That’s like a promise to self as well as to those who need to hear.  And of course, a promise not kept is an indication of a lack understanding of the problem or of care for the solution.
I have been a board member a number of times when either the board discovers a surprise or management delivers the news too late.  Neither are good recipes for CEO survival.   Not long ago, the board of one of my companies sat through an extended meeting just eight months after receiving a significant eight figure VC cash injection, reviewing income statements, budgets, sales statistics, Internet customer trends, and more. We discussed these with management thoroughly for a total of four hours.  Three weeks later, the Board received a communication from the CEO that the company had only weeks of cash left and immediately needed another round.

Can you guess the mood of the board members?  Management must have had some or total knowledge that cash was critical.  But not a word was said nor a discussion of alternatives suggested by the CEO or CFO, both present throughout the meeting. Well, both the CEO and CFO are now gone, and the VCs reluctantly passed the hat well before the budgeted cash-out date.  And the terms of the new round were ominous, reflecting the anger and obvious catbird seat control the VCs had with no competition for their investment and too little progress to show from their last round.

Bad things happen to good people. But good managers do their utmost to make sure there are no large surprises such as that one.

  • Having also having such experiences as a Board member on several of my investments, one learns to get better at asking questions to spot issues early and taking responsibility for being proactive to mitigate disaster. While doing so usually means you’re not popular, it’s better than watching the $ evaporate !

  • Dave we thank you for a very timely message for the MSI Team. As we shared with the management team this morning, “have no fear, to share your fears”. As you say above;

    “Small deviations from the trend or norm if unchecked often become much larger over time”.

    “Small deviations” start with awareness by one associate. That associate must have the trust, responsibility, and freedom to voice that fear in an appropriate communication to the team.

    Thank you again for a powerful message in leadership,

    Rick

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