In business, numbers often behave like clever teenagers who don’t want to get in trouble: They don’t necessarily lie, but they don’t tell the whole story. And like parents who trust their child—sometimes a little too much—business leaders often fail to ask the right questions to uncover the hidden truth.
As a consultant who has advised companies in innumerable industries over my career, I have seen many different ways of creating a successful business. But when it comes time to elevate a business to the next level or execute a successful transaction, the one common thread is finding valuable information beneath the surface-level data.
When times are good and the business is not in trouble, an owner probably doesn’t see the need to question whether there is another story behind the numbers. But looking deeper can often uncover operational inefficiencies, cost overruns, and obsolete assets. Addressing these issues will lead to increased profits or a much more lucrative exit—or simply make a company more resilient for the unexpected.
Here are three stories of business owners who discovered that their numbers were hiding critical issues in plain sight.
Think Beyond the Average
Steve, the owner of a manufacturing company, was interviewing a prospective chief financial officer. During the interview, Steve boasted that his inventory turned over seven times a year. The CFO candidate told him that while seven was a great number, she would be more interested in looking at which items had a turnover of 14 and which had a turnover of zero. That answer got her the job!
When the newly minted CFO took over, she tackled the obsolete and slow-moving items in the warehouse and took them out of circulation. By concentrating on the products with the highest turnover, Steve’s company saw a marked increase in efficiency and profits.
Stronger, more informed decision-making will lead to greater efficiency and profits—which is especially valuable in an economic or business downturn.
Take Inventory Seriously
When business is good, it’s easy to think it is because your company is doing all the right things. Jeff was confident in his company’s strength because he had no debt and no trouble meeting his obligations with his current cash flow.
But while undergoing due diligence in preparation for the sale of a division of his company, issues surfaced that had been buried in his inventory management and costing. These issues resulted in a lower sale price. Had the issues been uncovered and resolved sooner, the division could have been sold at a higher price.
A Profitable Demonstration
Theresa had the foresight to call in a consultant to examine her company’s financials before initiating a sale. The consultant noticed the company had treated demonstration equipment in its lobby as an expense rather than an asset to be placed on the balance sheet. She suggested adding back the cost of that equipment, some $700K, to the balance sheet.
When Theresa eventually sold her company for 10 times earnings, that seemingly small decision resulted in an additional $7M windfall.
Throughout my career, I have frequently encountered people who attempt to make a holistic assessment of a company’s financial health based on just one or two statistics, and miss flashing warning signs or hidden gems just beneath the surface. As business owners and investors navigate COVID-19, having the foresight and taking the initiative to look deeper into the numbers is particularly valuable.
Fortunately, the way to avoid these mistakes is simple: Routinely search for weak areas. If you are regularly looking for ways to improve your accounting practices, you will find ways to improve practices throughout the company. If you are engaged in a transaction, taking the time to find, understand, and address hidden issues can lead to a more successful outcome.
Stronger, more informed decision-making will lead to greater efficiency and profits—which is especially valuable in an economic or business downturn. Just remember, sometimes numbers don’t tell the whole story.
