Gary Sutton is an expert in corporate restructuring, and this little book is packed with excellent material. If he is interested in business or has a business, this book should be on his desk. Use it as a business desk reference. I am a big believer in “inversion”, which is studying the opposite of things. If you want to be successful, study success and failure to really understand the full spectrum. Gary’s book outlines 5 important early warning signs that are similar to blood pressure, insulin levels, cholesterol, and heart rate for physical health.
Why is this important to me?
There are several reasons that you should be aware of that make this book important. Are you an employee? If so, then you need to read this book. The early warning signs will ensure that your business is strong. Enron employees thought their money and retirement were safe. As we all know, this was not the case. One of the fundamental principles of debt would have given them the knowledge to make a change before losing their entire retirement.
Do you have a business? If so, you should understand all the principles described in the book. You have a fiduciary responsibility to ensure that your business is sound to all stakeholders. This is important because they depend on you and it is imperative to understand these early warning signs so that you can make the necessary changes.
Gary uses advice from his grandfather as a coal miner to outline the top 5 problems to avoid. I’ll focus on the 5 without the history, but I understand that coal miners used to use canaries to detect a gas leak. Therefore, if the canary died, they knew they had to evacuate the coal mine. We will dive into each of the 5 principles now:
1. Can’t Beat Losses – You see this over and over again where short-term Wall Street conscious companies focus on top-line growth with no regard for profit. This is a bad idea. Mergers of two mediocre companies that have top-line growth only produce a great average company that will lose money.
The first warning signs are:
1.) If the company’s revenue has grown at twice the rate of net profit for three years
2.) The sales force is commissioned by volume, regardless of profit.
3.) Aisle conversations are about sales, not profit.
2. Debt is a Killer – This one is confusing, but Gary provides a great indicator of when debt is too much. If he’s seen any of my other summaries, then he knows I’m a big fan of OPM (other people’s money) to leverage good debt to buy cash flow assets. That being said, too much debt can kill you in bad times.
The first warning signs are:
1.) Debt to equity exceeds 1:1
2.) Equipment is always rented, never bought
3.) Executives spend more time with bankers than with clients.
3. Fools Fly Blind: This one is all about financial controls. When these are neglected, no one knows where the business really is. This is a killer because operating profits and losses take too long to be distributed or worse, not even used 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.
The first warning signs are:
1.) Year-end audit adjustments exceed 1% of revenue or 5% of profit.
2) Books are not closed within two weeks of the end of the month.
3.) When you ask employees where the company makes its best profits, no one knows.
4.) There are no lead indicators for sales.
4. Any Decision Beats No Decision: “Analysis paralysis” kills innovation and speed. These two factors separate the market leaders and everyone else. When people are afraid to make decisions or spend too much time covering their own asses, it uncovers deeper company problems and poor leadership. These behaviors create bureaucracy, inefficiency, and ineffectiveness. Take a look at my summary on how the wise decide to overcome this bad behavior.
Early Warning Signs:
1) The mission statement tries to say many things to many people (touchy)
2) The titles of the brochures and advertisements do not offer specific and significant benefits to the buyers.
3) Employees, customers and suppliers give different answers when asked what the company does best. The leadership has failed. Anodyne companies die.
5. Markets grow and markets die: Business leaders must recognize when markets are dying. If they don’t, reinvestment produces “diminishing returns.” Basically this means that the company will die by a thousand cuts. In the book Good to Great, Jim Collins profiles Kimberly Clarke’s entry into the consumer paper business and her exit from the traditional business. They had to sell the mills. This was a great decision that worked, but it can be very difficult because she has an established business that makes money. I can vouch for number 5 because it has happened in my own business. We have had to reinvent ourselves twice in the 14 years that I have been working on it. There are types of businesses that are more successful and easier than others. This is worth studying in itself and I’ll outline the types of businesses in future roundups.
Early Warning Signs:
1) Sales have fallen two years in a row.
2) Competitors’ sales have fallen two years in a row.
3) Nobody is making money.
In short, Canarias Empresariales is a must-read book. The lessons are critical if you’re striving to build a business, and the lessons can translate to your personal finances as well.
I hope you found this short summary video helpful. The key to any new idea is to work it into your daily routine until it becomes a habit. Habits are formed in as little as 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 not equity. Through daily discipline and simple daily changes, this can easily change.