A financial model should analyze the complex relationships between costs, volumes and revenues that lead a company to be profitable. It should provide an early warning that profitability is deteriorating so that management can take action. What are some early warning indicators that a company is becoming less profitable as its grows its top line—and might even risk growing itself out of business?
Tony Cord brings to Newport an accomplished background as a practice leader, growth driver, board member and advisor to mid-market, emerging growth and PE sponsors. He leads Newport's Mid-Atlantic Practice.
"If you keep an eye on your cash cycle- the number of days from closing a transaction to collecting the cash from it--and watch that trend regularly you'll have early signals and an enhanced ability to pivot and plan effectively with your capital sources."
Bill has deep expertise in building and running industrial manufacturing and construction companies. Most recently he was President of Precision Industrial Contractors, which serves the industrial construction market. In that role he reduced the company’s financial breakeven point, producing more with fewer resources and achieving ROE that peaked at over 100% per year. He achieved superior customer recognition and transformed the company’s safety culture, notching a 3 year TRIR recordable safety rating of "0".
"Revenue growth must bring increasing free cash flow, or revenue growth is counterproductive. Profit from operations, a measurable metric common to businesses built with projects or products or services, must support the company's SG&A cost plan and an acceptable return to shareholders. Measuring operating profit changes in gross dollars, as a percentage of revenue, or a variation against budget will create the earliest indication that the profit plan is adrift."
Lynn has had a diverse career as an executive and advisor. As President and Founder of Lednicky Enterprises, he has provided expert advice to the energy, utility, and infrastructure sectors. His engagements have included M&A support, operational and financial restructuring, renewable energy, project development and financing and advising on production and use of natural gas as a domestic transportation fuel.
"Among the most telling early indicators of deteriorating financial performance are declining cash position, weakening working capital position, order backlog; G&A growing faster than revenues or cost of goods sold."
Bill was most recently CFO and COO of Avion Systems, a provider of staffing services to the telecommunications and technology sectors in Atlanta. In that role Bill was responsible for staffing, project management, human resources and finance functions, helping the company develop controls and forecasting processes.
"The main measurement that needs to be tracked for early warning signs of declining profitability is gross margin by line of business. A change in the revenue mix can contribute to gross margin erosion and lead to a company growing itself out of business."
Doug Payne is an experienced executive leader and Board member with a successful track record of building growing profitable companies. At Tatum he was a Managing Partner, Regional Practice Leader and member of Tatum's Board of Directors. He led three different practices at Tatum and retired from the firm running the executive services practice in Tatum's largest office (Dallas).
"Working capital issues are a key indicator. Sales may be going up and up but where is the cash? Cash flow problems develop as cash gets sucked into building receivables, inventory and other outlays. The company can grow itself right out of business. In some cases the company may have inadequate capital to support growth, in other cases growth in itself can lead to cash flow difficulties."
Margarita is an experienced leader who built a multimillion dollar global business unit, building on roles in engineering, sales and marketing. She has demonstrated expertise in leading global teams to open global markets.
"Cash flow problems are a key early indicator that a company is at risk. Adding additional labor to keep up with the growth can exacerbate receivables timing issues and add to the risk of growing yourself out of business. This is another reason why a dynamic financial planning process is critical as you grow your business."
Mark Rosenman has deep experience developing processes, systems and content to create value from intellectual capital. Serving as the Chief Knowledge Officer at Tatum, he successfully drove strategies to develop, capture, share and deploy the knowledge and experience of the firm's professionals.
"A key warning sign is that the company’s business model is proving in reality to be less scalable than anticipated. The assumption that gross profit will increase at the same or at a faster rate than top line revenue can prove to be false. Left unchecked, a downward spiral of decreasing profitability may occur as the company grows. This can be fatal. "
John has delivered top- and bottom-line results running a wide range of companies and dealing with challenges like acquisitions, lean manufacturing, supply chain optimization/low cost sourcing, new product development and brand and channel management.
"In my experience, the early warning signs of real or potential problems include declining Gross Margins, rising Past Due Orders, increased Quality Escapes, disproportionate increases in Overhead Expenses and a negative movement in the Current Ratio."
Eran has diverse experience in executive management, venture capital, private equity and M&A, including turnaround, restructuring and special situations transactions. He was the Chairman of the Board and has been CEO of PowerSines Ltd, an international energy efficiency company. In this role Eran led a private equity transaction involving the purchase of a family-owned company in the power/cleantech sector.
"The most important warning sign in my opinion is gross margin or cost of goods sold. Other warning signs are that the company is having difficulty scaling up to fulfill and deliver its sales. Other concerns could be an elongation of the sales cycle and the cycle whereby sales turn into cash received. "
Have you experienced these warning signs? If you have it may be time to build an economic model. Find out how in this FREE guide "12 Steps to Build an Economic Model."
