Gary Sutton is a business turnaround expert and this little book is packed with great stuff. If you are interested in business or have a business then this book needs to be on your desk. Use it as a business desk reference. I am a big believer in “Inversion” which is to study the opposite of things. If you want to be successful then study success & failure to really understand the full spectrum. Gary’s book outlines 5 major early warning signs which are similar to blood pressure, insulin levels, cholesterol and heart rate for physical health.
Why is this important to me?
There are several reasons you need to take into account that make this book important. Are you an employee? If so then you need to read this book. The early warning signs will make sure that your company is solid. Enron employees thought that their money and retirement was safe. As we all know this was not the case. One of the main principles on debt would have given them the knowledge to make a change before they lost all their retirement.
Do you own a business? If so then you need to understand all of the principles outlined in the book. You have a fiduciary responsibility to make sure your company is sound to all stakeholders. This is important because they depend on you and these early warning signs are imperative to understand so you can make the necessary changes.
Gary uses his grandfather’s advice as a coal miner to outline the 5 main problems to be avoided. I will focus on the 5 without the story but understand that coal miners used to use canaries to detect a gas leak. Thus if the canary died then they knew they had to evacuate the coal mine. We will dive into each of the 5 principles now:
1. You can’t outgrow losses – You see this time and again where short term Wall Street conscious firms focus on top line growth with no regard to profit. This is a bad idea. Mergers of two mediocre companies that have top line growth only yield one big average company that will bleed money.
Early warning signs are:
1.) If company revenues have grown at twice the rate of net profits for three years
2.) The sales force is commissioned on volume, without regard to profit.
3.) Hallway conversations are about sales, not earnings.
2. Debt’s a killer – This one is nebulous but Gary gives a great indicator of when debt is too much. If you have seen any of my other summaries then you know I am a big fan of OPM (other people’s money) to leverage good debt to buy cash flow assets. With that being said, too much debt can kill you in bad times.
Early warning signs are:
1.) Debt to equity exceeds 1:1
2.) Equipment is always leased, never bought
3.) Executives spend more time with bankers than with customers.
3. Fools fly blind – This one has to do with financial controls. When these are sloppy then nobody knows where the business really is. This is a killer because the operating P&L’s take too long to distribute or worse than that they don’t even use them as tools. Also, when bigger companies focus on revenues and earnings per share but have no idea if they have enough cash to cover payroll.
Early warning signs are:
1.) Year-end audit adjustments are more than 1 % of revenues or 5% of earnings.
2) The books don’t close within two weeks of the month’s end.
3.) When you ask employees where the company makes its best profits, nobody 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 market leaders and everybody else. When people are scared to make decisions or spend too much time covering their own asses then this uncovers deeper company problems and bad leadership. These behaviors create bureaucracy, inefficiency and ineffectiveness. Check out 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 (wishy-washy)
2) Brochure and ad headlines don’t offer specific and meaningful benefits to buyers
3) Employees, customers, and vendors give different answers when asked what the company does best. Leadership has failed. Nondescript companies die.
5. Markets Grow and Markets Die – Company leaders have to recognize when markets are dying. If they don’t then the reinvestment yields “diminishing returns”. Basically this means 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 exit from their traditional business. They had to sell the mills. This was a big decision that worked out but can be very difficult because you have an established business that makes money. I can attest to number 5 because it has happened in my own business. We have had to reinvent ourselves twice in the 14 years I have been working it. There are types of businesses that are more successful and easier than others. This is worth the study in and of itself and I will profile business types in future summaries.
Early warning signs:
1) Sales have dropped two years in a row.
2) The competitors’ sales have dropped two years in a row.
3) Nobody’s making money.
In summary, Corporate Canaries is a must read book. The lessons are critical if you strive to build a business and the lessons can translate to your personal finances as well.
I hope you have found this short video summary useful. The key to any new idea is to work it into your daily routine until it becomes habit. Habits form 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 the debt and no equity. Through daily discipline and simple daily changes, this can change easily.