Every CEO/business owner wants to achieve financial success through their business. But what exactly does that look like? (click here to access a self-assessment analysis to test your readiness). Financial success for a business consists of five basic elements:
  • Sustaining profits
  • Maintaining a strong cash position
  • Building a healthy balance sheet
  • Providing adequate return to stakeholders
  • Establishing a value that is transferable

These things don't happen by themselves. They come about as the result of practicing financial discipline in the business.

Financial discipline can be defined as the establishment of a culture and process in your organization that emphasizes the importance of profit, risk assessment, return on assets employed, consistent results, effective measurements and a reliable reporting system. It also requires an organizational commitment to communication and training that allows you to manage the business around a model that meets financial expectations. Financial discipline reflects a state of order in your business that leads to financial success.

A Culture of Financial Discipline

To build a culture that supports financial discipline the following actions are recommended:

  • Establish a reliable financial reporting system. This includes:

    • Closing the books in a timely manner (seven to nine working days)
    • Striving for consistent results from one period to the next
    • Having a bottom-up forecast and striving for predictability
    • Learning to forecast the business
    • Having a line-item budget
    • Conducting a monthly variable analysis
  • Segment your business by product lines, markets and customers. Measure each unit independently so you understand how it affects the business as a whole.
  • Benchmark your financial performance against a standard. Use the Risk Management Association (formerly known as Robert Morris Associates) data and trade association data. Make sure you know what your bank is using to benchmark you (often RMA, but check the code). If you run a public company, use the information available through 10Qs, 10Ks and other SEC filings.
  • Focus on the gross margin. Gross margin is a function of cost of goods sold. If you can't drive down costs, you will eventually lose the gross margin battle.
  •  Have an accurate direct costing system. In order to price effectively and set realistic margin goals, you have to know how much it costs to produce and deliver your product or service. Find a way to track your costs, whether by sampling how time is used, or by using a more robust system like Activity Based Costing.
  • Drive velocity through the balance sheet. Velocity relates to how fast you turn over inventory and receivables. The greater your velocity, the better your cash flow.
  • Measure your cash cycle and manage it. Follow the flow and application of the money in the business. How and when does it come in? How and when does it go out? How many days’ cash do you have at any one given time?
  • Forecast working capital and arrange your growth financing well ahead of your needs.
  • Build value by establishing targets for EBITDA earnings. EBITDA (earnings before interest, taxes, depreciation and amortization) represents a critical measurement in terms of deciding value. Strive for continual improvement of your EBITDA.
  • Drive accountability and communication throughout the organization with scorecards and key indicators. By identifying and tracking the right key indicators, you can spot the danger signs in plenty of time to take appropriate action.

Translating Strategy into Results

Financial discipline also requires aligning the financial side of the business with your strategy. This involves building financial models and templates predicated on a strategic model that answers three critical questions:

  • Who are we going to sell to?
  • What are we going to sell?
  • How are we going to sell it?

This process starts with the strategic plan, which identifies where you want to go and what you want to achieve. Follow this with your tactical plan, which talks about how you will do it, and the individual plans, which outline who will do what and by when. These plans must have quantifiable, measurable numbers so you can track performance and course-correct and counsel when necessary.

The last piece of the puzzle involves performance-based compensation to get your people tied into the result. You want them to make a lot of money if you make a lot of money. At the same time, you want them to have some skin in the game if you don't make money. Many companies have great strategic and financial plans that never go anywhere. When you take the time to translate those plans into specific action plans and reward your people for achieving them, you greatly improve your chances of achieving your company's financial goals and objectives.

Excerpted by an article written by Kraig Kramers, president of Corporate Partners Inc.

Determining Your Z-Score

In the 1960s, a New York University business professor named Edward Altman combined four ratios into what has become known as the Altman Z-score, the best-known predictor of business bankruptcy. His research showed that nine out of ten companies that had dangerous Z-scores ended up going out of business.

The Z-score serves as an early warning signal, much like the light on the dashboard of a car. If the light starts glowing orange and saying ‘check engine,' you'd better get your car to a specialist right away. The Z-score works the same way for businesses. It doesn't clearly identify the cause of the problems, but it tells you something has gone seriously awry and you had better take immediate corrective action.

As a part of our diagnostic tool set we have the ability to analyze your overall financial condition and prepare a Z-score analysis for your business. Or, if you prefer to run your own numbers, we provide an online work sheet for the calculation.

Like many financial indicators, the Z-score represents a snapshot in time. Although you can use monthly or annual data, it's important to use the most recent and up-to-date information. You can also track several months or years at a time to see the trend of your Z-score, but its main value lies in knowing how close your company is to bankruptcy today.

AAG helps business owners and managers quickly and efficiently gain perspective on the multiple layers of their enterprise through its Financial Performance Solutions (FPS) tool. Far too many organizations are inundated with useless data they cannot understand and cannot use to make sound financial decisions. FPS offers an efficient and cost-effective alternative to complex financial reporting. For more information on how Financial Performance Solutions can help your business maximize its financial potential, visit our website at www.financialperformancesolutions.com.
Learn how AAG helped a rapidly expanding low temperature thermoplastics manufacturer find the capital resources and favorable terms it needed to support its future growth. Link to the complete case study.

The Federal Reserve continues to aggressively address continuing weaknesses in the national economy and the financial/credit markets. Two more rate reductions in the target federal funds rate have reduced the level to 2%. However, there was not complete unanimity on these cuts from the FOMC. The consensus view is that the Fed will hold tight on any more rate cuts for the balance of 2008.

The FOMC continues to carefully maintain a monetary policy balance between economic growth and the risk of inflation. As they noted in their statement from the just concluded meeting:

“Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.

Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.”

Although not officially in recession, the national economy barely grew during the first quarter. Initial GDP measures showed a 0.6% growth rate for Q1 2008. The increase in real GDP reflected positive contributions from personal consumption expenditures (PCE) for services, private inventory investment, exports of goods and services, and federal government spending that were partly offset by negative contributions from residential fixed investment and PCE for durable goods. Imports, which are a subtraction in the calculation of GDP, increased owing to the overall weakness in the U.S. dollar. April payrolls fell just 20,000 which may suggest the extent of the economic slowdown/recession may be limited. With the Fed on hold, and the downside to the economy more limited, the outlook is for a narrowing of credit spreads at the short end of the curve. In addition, the Fed also announced a broader liquidity facility. This supports the view that the Fed remains eager to help the markets, but also cautious on lowering the federal funds rate at the same time.

With all the turmoil in the financial and credit markets, should I be concerned about my bank and my bank relationship?

Without question, what we are currently experiencing is unique and unprecedented in our lifetimes. Probably only the Great Depression of the 1920’s and 30’s comes close to the strain and stress clearly evident in today’s credit markets.

A major differentiating factor between now and then has been the response of the Federal Reserve. During the Great Depression of last century, the Fed took a much more “hands off” policy posture regarding what was going on in the country economically. This is in contrast to the very activist Fed we have today and the various policy actions they have been implementing. From reducing interest rates, increasing liquidity in the markets and making borrowing capabilities available to bank and non-bank institutions, today’s Fed has been actively managing their policy response.

Even with that, you should always be aware of the financial condition of your bank and any impact, positive or negative, that may have on you and your business. Some points to note:
  • Actively manage your bank relationship by regularly meeting with your relationship manager to keep them apprised of your business performance and to keep informed about the bank’s current and future performance and direction.
  • Make sure you understand the credit facilities the bank makes available to you and what could happen to negatively impact their availability. In some cases, the bank may impose operating and financial performance covenants that, if violated, could cause your credit availability to be changed drastically or even terminated.
  • On the depository side of the relationship, remember that your deposits are treated as liabilities on the banks balance sheet. In essence, you are lending your money to the bank. In the event the bank was to fail, the U.S. Government insures deposits up to $100,000 per registration. Amounts over this could be at risk of loss as you would then be considered an unsecured creditor.
  • Don’t forget about any underlying investment positions you may have in the event you are utilizing an overnight investment management program. Make sure you understand the nature of the investment instrument that these funds are going into and the safety/security of these instruments. Some banks invest these funds into commercial paper issued by the bank or its parent holding company which represents an unsecured loan to the borrowing entity.

Contact us if you have any questions or would like us to perform a comprehensive analysis on your existing banking relationship.


Alliance Advisory Group (AAG) is a business management advisory firm offering expert operations and financial guidance. Services include strategic planning and execution, financial management, organizational planning and development, technology management, and project management. The myriad of performance-based solutions AAG provides address the real issues organizations face and help companies realize increased effectiveness, profitability and sustainability.

You pay us a great compliment when you refer your professional associates to us. If you know of an organization that would benefit from the services of Alliance Advisory Group, your referrals are always appreciated.