6 Questions Every CEO Must be Able to Answer - Mackey Advisors1. What are the lead­ing Key Per­for­mance Indi­ca­tors (KPI) in this busi­ness?

Many CEO’s try to man­age their busi­ness by only review­ing their P&L.  This is a dis­as­ter in the mak­ing, it would be akin to dri­ving coast to coast look­ing in the rear view mir­ror.  In this fast paced world, you need to be nim­ble and agile, able to respond and make course cor­rect­ly quick­ly. This is done with lead­ing KPI’s.

 

2. What is the com­pa­ny Break Even?

Breakeven is the lev­el of sales need­ed for a com­pa­ny to attain a $0 bot­tom line.  This seems a bit sil­ly at first as no one’s goal is to break even.  You are in busi­ness to make a prof­it, but your breakeven is use­ful because it gives you a con­crete floor.   If you are run­ning con­sis­tent­ly below breakeven, it is time to look at restruc­tur­ing your costs to re-estab­lish prof­itabil­i­ty at the low­er sales lev­el.  Com­pute breakeven by tak­ing your fixed cost and divid­ing by your gross mar­gin%.  For exam­ple, $500,000 in fixed cost divid­ed by a 20% gross mar­gin is $2,500,000 in annu­al sales or $208,333 per month.

 

3. What is your gross mar­gin?

Gross mar­gin is the most impor­tant num­ber on your income state­ment, espe­cial­ly in growth mode.  Too many com­pa­nies grow by reduc­ing mar­gin only to dis­cov­er they are unprof­itable at the end of the year.  Be clear on your pric­ing poli­cies and mon­i­tor your mar­gin week­ly.

 

4. How effi­cient­ly are you man­ag­ing your non-cash assets?

What are your major non-cash assets? Accounts Receiv­able, Inven­to­ry, Fixed Assets?  Too often CEO’s focus on their income state­ment and ignore their Bal­ance Sheet.  As a result, accounts receiv­able get old and uncol­lectible accounts increase; inven­to­ry gets stale and becomes obso­lete.  This is like drilling a hole in your floor and dump­ing cash into it.

 

5. Where is your cash posi­tion?

You don’t go out of busi­ness because you have are los­ing mon­ey, you go out of busi­ness because you have no cash.  There are plen­ty of suc­cess­ful com­pa­nies that spent years los­ing mon­ey, Ama­zon for exam­ple.  They stayed in busi­ness by attract­ing cap­i­tal until they became prof­itable.  Know how much cash is need­ed to run your busi­ness and watch it like a hawk.

 

6. What is your Return on Invest­ment?

Your busi­ness is like­ly your largest invest­ment.  If you invest­ed in any oth­er asset, you would expect to reg­u­lar­ly be apprised of your return.   Treat your busi­ness like an invest­ment, it will kick start you to increase your return.  Com­pute your return on invest­ment by divid­ing net income before tax by the fair mar­ket val­ue of your busi­ness.

 

Relat­ed Arti­cles:

A VERY Use­ful Tool: Trail­ing 12 Months Track­ing

Tips for Improv­ing your Finan­cial State­ments

Tak­ing Charge of Your Busi­ness in any Envi­ron­ment