Can You Get Net Assets From Statement Of Cash Flows Book Summary – Corporate Canaries – Avoid Business Disasters – Written by Gary Sutton

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Book Summary – Corporate Canaries – Avoid Business Disasters – Written by Gary Sutton

Gary Sutton is a business turnaround expert and this little book is full of great stuff. If you are interested in business or own a business, this book should be on your desk. Use it as a business office. I’m a big believer in “inversion” which is studying opposite things. If you want to be successful, study success and failure to truly understand the full spectrum. Gary’s book describes the 5 main early warning signs similar to blood pressure, insulin levels, cholesterol and heart rate for physical health.

Why is this important to me?

You should consider several reasons that make this book important. Are you busy? If so, then you must read this book. Early warning signs will ensure the strength of your business. Enron employees thought their money and retirement was safe. As we all know, that was not the case. One of the main principles about debt would give them the knowledge to make a change before they lose their entire retirement.

Do you have a business? If so, then you need to understand all the principles described in the book. You have a fiduciary responsibility to ensure that your business is good for all stakeholders. This is important because they depend on you and it is imperative to understand these early warning signs so that you can make the necessary changes.

Gary uses his miner grandfather’s advice to outline the top 5 pitfalls to avoid. I’ll focus on 5 without the story, but I understand coal miners used canaries to detect gas leaks. So if the canary died, they knew they had to evacuate the coal mine. We will now delve deeper into each of the 5 principles:

1. You can’t outgrow losses – You see time and time again how short-term-conscious Wall Street firms focus on top-line growth without regard to profits. This is a bad idea. The merger of two mediocre companies that have the highest growth results in just one big mediocre company that will bleed money.

Early warning signs are:

1.) If the company’s revenues grew twice as fast as the net profit for three years

2.) The sales force is ordered based on volume, regardless of profit.

3.) Hallway conversations are about selling, not making money.

2. Debt is a killer – This one is silly, but Gary does a great job of showing when debt is too much. If you’ve seen any of my other recaps, then you know I’m a big fan of OPM (Other People’s Money) for getting good debt to buy cash flow assets. That being said, too much debt can kill you in bad times.

Early warning signs are:

1.) The ratio of debt to capital exceeds 1:1

2.) Equipment is always rented, never purchased

3.) Management spends more time with bankers than with customers.

3. Fools fly blind – This has to do with financial control. When these are superficial, then no one knows where the business really is. This is a killer because the distribution of operating profits and losses takes too long or worse, they are not used as a tool at all. Even as larger companies focus on revenue and earnings per share, they have no idea if they have enough cash to cover payroll.

Early warning signs are:

1.) Audit corrections at the end of the year amount to more than 1% of revenues or 5% of earnings.

2) The books are not closed within two weeks of the end of the month.

3.) When you ask employees where the company makes the most profit, no one knows.

4.) There are no leading indicators for sales.

4. Any decision is better than no decision – “analysis paralysis” kills innovation and speed. These two factors separate the market leaders from everyone else. When people are afraid to make decisions or spend too much time covering their own asses, it reveals a company’s deeper problems and poor leadership. These behaviors create bureaucracy, inefficiency, and inefficiency. See my summary of how the wise decide to overcome this bad behavior.

Early warning signs:

1) A mission statement tries to say many things to many people (preferred)

2) Brochures and ad headlines do not offer specific and significant benefits to buyers

3) Employees, buyers and sellers give different answers to the question of what the company does best. Leadership has failed. Inconspicuous businesses die.

5. Markets Grow and Markets Die – Business leaders must recognize when markets are dying. If they don’t, then the reinvestment yields “diminished returns.” Basically, this means the company will die from a thousand cuts. In Good to Great, Jim Collins describes Kimberly Clarke’s entry into the consumer paper business and exit from their traditional business. They had to sell the mills. It was a big decision that paid off, but it can be very difficult because you have an established business that makes money. I can confirm number 5 because it happened at my company. We’ve had to reinvent ourselves twice in the 14 years I’ve been working. There are types of businesses that are more successful and easier than others. This is worthy of study in itself and I will cover the types of companies in future summaries.

Early warning signs:

1) Sales have fallen two years in a row.

2) Competitors’ sales have fallen two years in a row.

3) No one makes money.

In summary, Corporate Canary is a must-read book. The lessons are vital if you’re looking to build a business, and the lessons can be transferred to your personal finances as well.

I hope you found this short video summary helpful. The key to any new idea is to incorporate it into your daily routine until it becomes a habit. Habits are formed in just 21 days.

One thing you can take away from this book is to keep your debt to equity under 1:1. This is difficult for most people because they have debt and no equity. With daily discipline and simple daily changes, this can easily be changed.

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