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How to Build a Battle-Ready Balance Sheet

Guest: Randy Dewey, a coach at CEO Coaching International. Prior to becoming a coach, Randy assisted Blackstone in numerous turnarounds, worked in a private family office and in other public markets, raised several hundred million in debt and equity financing, and participated in 15 M&A transactions.

Quick Background: Our proven Making BIG Happen System combines BIG vision with an actionable plan. You can’t have one without the other and expect to grow. And the foundation of effective planning is a battle-ready balance sheet that will ground your goals and keep your company from growing broke.

On today’s show, Randy Dewey discusses how to identify the KPIs, the obstacles, the opportunities, and the team members you need to build your best balance sheet.

Keys to Building a Battle-Ready Balance Sheet from Randy Dewey

1. Assess your foundation.

“A lot of companies are moving through day-to-day issues,” Randy says. “And oftentimes we don’t take the time to sit down and really do the analysis on exactly what is our financial foundation? How solid is it versus what we think it is? Oftentimes people equate profitability with cash readiness and the two are disconnected in so many different ways. How liquid is your capital? How easily accessible is the money that’s actually within your working capital structure? How long has your cash conversion cycle been stretched out versus how profitable are you?”

In other words: cash is king, and as the CEO, it’s your responsibility to know what your cash flow looks like at all times. Delegate the data collection, of course, and if you don’t have a CFO yet consider hiring a fractional CFO to assist with this process. But reviewing the company’s cash situation has to be a mainstay on your to-do list.

“Certainly you want to review on your annual cycles,” Randy says. “And it is something that you really want to track over time. You need to have your liquidity measures in place. You need to be tracking not just your vertical analysis of your financial reports in a month, but you wanna do it over time. Am I grinding out on my liquidity or am I actually strengthening it? Am I producing more free cash flow this year than I did last year? And am I tracking in the right direction, knowing whether or not your foundation is eroding or strengthening? As you’re capturing your numbers, knowing the trend is very important.”

2. Turn obstacles into opportunities.

Why did some companies fold during COVID while others thrived? Because once their CEOs had put the right safety protocols in place, they pivoted to exploring ways that locking down could actually improve their businesses, from embracing WFH to reducing brick-and-mortar expenses to broadening their supply chains. Learning how to embrace — or better yet, anticipate — disruption can be a powerful way to reinvent your company and refresh your mission, values, and culture.

“That starts with the top and the leadership’s view of issues,” Randy says. “If you’re conscripting the collective energy of the entire organization to help you solve that problem, getting the collective will and the collective ideas out is going to be super important. Because the solution doesn’t just come from one person, from one office. It comes from the collective energy of the whole organization because of their experience, their views, the opportunities that the company may not even realize it has. Being able to conscript those things together and then pick the right ones is something that the leader really needs to push out so that you can understand exactly what are the opportunities that are really before us.”

3. Assemble a team that will build the right culture.

“You need to have the right team and the right complement of people in the right positions in the organization,” Randy says. “We have to have good culture in our organization. So if you want to make the types of dynamic pivots that we’re talking about, or be able to accelerate a strategy in the midst of an opportunity moment, you have to have the collective skill and talent of the organization really moving in that direction with clarity and alignment.”

One of the toughest team-building challenges for CEOs is being brutally honest about your people and how you’re treating them. You might not realize how much your ongoing tolerance of an underperforming “nice guy” is hurting your company until you spot the negative trend lines on your balance sheet. You may not realize how much your lack of workplace flexibility and silence on social issues is affecting your employees until they start heading for the door.

“During the pandemic, some CEOs were not recognizing the needs of our people and how to keep them at the table,” Randy says. “They were dealing with pandemic issues in their home, yet we were too focused, in some cases, on the business’ survival to the peril of how we treated our people. And now we wanna make sure that we are not just having the right people in the right seats, but also the right treatment, and that we are keeping our team at the table motivated and are recognizing the needs they have so that we can help increase that loyalty factor and retain our people. It’s costly to replace talent. Sometimes we make poor, short-term decisions about our team. Having good quality talent that’s loyal and understands their job and can be a contributor is a very valuable asset to the company.”

4. Focus on the right metrics.

With the rapid advances in analytics and AI, CEOs have a lot of data to monitor. It’s important that you maintain focus by answering the question: What’s your company’s BIG number? What’s the first KPI that you check when you’re reviewing your balance sheet? What’s the one number that looms a bit larger than the others?

Every company is going to have a different BIG number. It might be the conversion rate on cold calls, monthly sales to new customers, customer service satisfaction rates, your employee net promoter score. At the 20,000-foot level, we encourage our CEO coaching clients to keep an eye on CAGR and EBITDA. And when he’s helping CEOs build balance sheets, Randy likes to measure if a company can take 80% of its EBIDTA and convert it into cash at a given moment.

“Whether you pick EBITDA or another one, what we want to do is make sure that it’s not too complicated, and that we are tracking in the right direction,” Randy says. “And we are holding a few metrics in front of the organization. And then when those metrics are tracking in the right direction, we know that we’re doing all the right things underneath to actually get to the end goal.”

5. Don’t blink.

If you’ve worked with your CEO coach to make an effective annual plan, drilled into your KPIs with your c-suite team, and spared no expense to hire people who will further your culture, then looking at your battle-ready balance sheet should fill you with confidence. With the right team and plan supporting you, no goal should look too BIG, no pivot point too daunting. This isn’t the time to slip into the knowing-doing gap. It’s time to cross the bridge you’ve built for yourself and start executing.

“Of course, I’m assuming you’ve got your mission, your vision, your values, and your purpose all aligned,” cautions Randy. “Your human resources plan is perfect. You’re doing regular cadence with your meetings and you’ve got accountability in the system. Once you get that, it’s now moving through with purpose and not blinking and knowing that we will get there. Come hell or high water, we’ll figure it out. We’ll find a way to navigate through whatever obstacles come at us. Lead with passion and inspire your people and know that you can accomplish these things if you think smart and work hard.”

Top Takeaways

A battle-ready balance sheet requires solid financial planning that’s supported by an effective business and people strategy. High liquidity and a battle-ready balance sheet positions your company for 3 things:

1. Flexibility amid turbulence, whether it’s a recession or disruption of some kind.

2. Quick to pounce, during trouble others blink and they either fail or run into a liquidity crisis and need to sell quickly. However, if you are financially strong, you can pick up customers or fledgling competitors at 10 cents on the dollar.

3. Value creation is exponential for a company that can turn 80% of its EBITDA into free cash flow. Whether you do a discounted cash flow, earnings multiplier, book value/liquidation valuation, or other valuation model, a company with a battle-ready balance sheet has incredible negotiating leverage and can achieve incredible exit multiples.

About CEO Coaching International

CEO Coaching International works with CEOs and their leadership teams to achieve extraordinary results quarter after quarter, year after year. Known globally for its success in coaching growth-focused entrepreneurs to meaningful exits, CEO Coaching International has coached more than 1,000 CEOs and entrepreneurs in more than 60 countries and 45 industries. The coaches at CEO Coaching International are former CEOs, presidents, or executives who have made BIG happen. The firm’s coaches have led double-digit sales and profit growth in businesses ranging in size from startups to over $10 billion, and many are founders that have led their companies through successful eight, nine, and ten-figure exits. Companies working with CEO Coaching International for two years or more have experienced an average EBITDA CAGR of 67.8% during their time as a client, nearly four times the U.S. average and a revenue CAGR of 25.5%, more than twice the U.S. average.

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