Why is our business so volatile?
"I've hired first-class managers, we have well-crafted
performance incentives in place, and our market is pretty stable.
Yet our year-to-year results fluctuate wildly. Why is this happening
(and how can we fix the problem)"
Mike: It sounds like you've adopted a "paint
by the numbers" approach to running your company. It's fine
to adopt smart management practices and hire top-notch people, but--as
you've discovered--that's not a guarantee of success or even consistent
results.
Often, the biggest challenges a CEO faces are outside the company.
For instance, your market share may suddenly shrink because a competitor
has popped up with a much better technology, a lower price, or a
new distribution channel. A new government regulation may scare away
loyal customers because you're now "not compliant". Industry
gossip may hint at executive turnover, financial troubles, or disgruntled
customers. You don't control these things: At best, you can only
react quickly and smartly.
You'll notice that world-class CEOs almost always spend much of
their time on the road, talking to customers face-to-face rather
than tinkering with internal org charts. That's because good CEOs
know it's essential to hear unfiltered feedback about what customers
want and what's going on in the marketplace. They may still get caught
by surprise, but it doesn't happen often.
What's a SAS 70 review?
"My auditor tells me I should have a SAS 70 internal review
done. What is this all about?"
Mike: Many companies use outside service organizations
for key operating areas, such as payroll processing, trust services,
and e-commerce payments. If one of these service providers were to
perform poorly, or go out of business, that could have a material
adverse impact on the company’s financial statements. SAS 70
reviews (from the “Statement on Auditing Standards No. 70")
were proposed by the AICPA about 20 years ago and are audits evaluating
the internal controls confirming that these services are in place
and operating effectively.
Incidentally, you may have trouble attracting major-league board
members if you haven't conducted a SAS 70 review, especially if you
outsource your payroll processing.
Can we write off a government-backed receivable?
"A government agency in California has owed us money for
almost three years now, and they keep making lame excuses. It seems
weird to write off a government-backed receivable, but I could
really use the tax deduction this year. Advice?"
Mike: You can certainly write off any receivable
that's three years old and that you're unable to collect. If California
is finally able to pay its bills, of course, you'll have to record
the payment as "new" revenue.
Before writing off the bill, however, you should make one last attempt,
in person, face-to-face, to find out if it's truly uncollectible
(and why). Governments work on annual budgets and typically can only
spend for costs in this year’s budget. Your bill may have busted
the budget for that year and has been put into the “let's hope
we can pay this next year” folder. If that’s the case,
see if the agency can find some way to roll it forward to the current
year. I'm sure the agency employees you worked with are deeply embarassed
by the situation and will help put pressure on their accounting staff.
How can I recapture excessive options?
"I was way too generous about handing out stock options
when I launched my company. Now I've ended up with a couple of
executives who don't contribute much but stand to collect an unfair
share of our option pool when we sell the business. How can I readjust
their shares?
Mike: There's not much you can do about shares
that have vested. That's water under the bridge.
But you have a good deal more leverage with any options that are
still unvesteds. Take a look at the employment contracts you have
with these guys. It's likely you'll find some contract language about
negotiating "changes" in compensation. That usually means
raises, but it can also mean pay cuts. In other words, if they want
to keep their jobs, you can require them to give up their unvested
options.
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