Business Page – February 11th, 2001


Lessons From Wall Street - Business 101

Introduction

A never-ending stream of bad news has been pummeling the American business community over the past year. First there was the fall of the once mighty Microsoft accused by the US government of unfair business practices in order to create a monopoly condition. Next there came the crashing and burning of the once high flying internet companies, the so-called dot-coms, whose stratospheric values in the stock market were unsupported by profits or sustainable business models. It was common to see share prices rise from initial public offerings as low as $4 to valuations in excess of $100 in the space of weeks.

Debacle

However cash flow never lies and once the reality of their burn rates (cash utilization relative to cash availability) sunk in, the gusher of funding which once appeared unending suddenly dried up. The next debacle was the stream of companies who suddenly acknowledged that they would miss their growth, revenue and profit forecasts and caused a collapse in their values in the stock market. What has been scary about this is that these warnings have come from stellar names such as IBM, Dell, Oracle, Chase Manhattan (now JP Morgan Chase) Bank, Microsoft, Intel, Motorola, Nokia, Cisco Systems and many of the leading powerhouses who not so long ago seemed able to reach any earnings goal they set.

Short-Term

Suddenly no company no matter its past reputation is safe from bad news and now there is suddenly increased scrutiny and questions surrounding the accounting practices of companies. Management of publicly traded companies on the US stock market have been forced to concentrate on short-term earnings targets and are often unable to manage for the future. This is a result of fear of the negative consequences of missing quarterly numbers. The latest big name company to be investigated for questionable accounting practices is Lucent Technologies.

Innovative Accounting?

This company, formerly AT&T’s Bell Labs, was not so long ago the darling of investors and an icon of American innovation. Now the Securities and Exchange Commission (SEC), the watchdog organization responsible for monitoring companies traded on the stock market, is questioning whether its accounting practices were a little too innovative. The SEC is formally investigating the company in order to determine whether the telecom equipment company committed fraud, according to The Wall Street Journal.

The SEC is specifically interested in whether Lucent improperly booked $679 million in revenue during the 2000 fiscal year, which ended Sept. 30, says the paper. In December the company restated the same amount of revenue after conducting its own investigation. At the time, Lucent deducted $199 million in credits offered to customers, and $28 million for a partial shipment of equipment. The company also took back an additional $452 million in revenue it had sent to its distribution partners but never actually sold to end customers.

According to the Journal's account, the SEC is investigating Lucent's procedures for booking sales, especially its use of "nonrecurring credits," or one-time discounts, given to customers, as well as its accounting treatment of software-licensing agreements. The Commission is also looking at how Lucent recognized revenue on sales to its distributors, who may not have sold the products, a practice known as stuffing the channels. The SEC has also requested documents from Lucent's customers and independent auditor.

Lessons

There are lessons to be learned from the problems being faced by American businesses and local businesspersons would do well to take heed since those companies once appeared invincible. Managers must be prepared to constantly reinvent the company and shake things up since as they say “you snooze you lose”. They must be able to spot danger zones within a company, and should not develop an emotional attachment to a program or policy. This is step one and business leaders must have the guts to be able to handle the unpleasant aspects of reorganization.

Simple Step

Another simple step which is often overlooked is the establishment and monitoring of meaningful, realistic budgets. Managers should be forced to review daily their expense/revenue ratio, and when it moves out of line, take immediate action to lower expenses. Personnel should be evaluated so as to ensure that there is no overstaffing, expense accounts cut, and unnecessary services cancelled. Regular monitoring will make it easier to spot areas of increasing expense, and take the appropriate action.

Employees

Each employee should be made aware of how his or her expenses impact the bottom line - but be honest. Many employees do not realize that their own activities cause waste: poor work habits, improper monitoring of receivables, and lack of cost-consciousness and have a direct negative impact on the company. They need to be told and reminded. When there is a negative divergence in the expense/revenue ratio, that is the time to make changes - not after the trend has become a problem.

No Sacred Cows

Whether it is a branch office, a pet project, an employee, or a company policy, if it is not producing according to benchmark expectations, it must be either eliminated or steps taken to ensure immediate improvement. There must be no sacred cows. Do not leave employees in the dark about any changes or rumors will add to already low morale and that will make your reorganization more difficult. If layoffs are necessary, conduct them from the top down, first removing highly paid executives who have not performed, then cleaning out redundancies and problem staff.

Target Markets

With a few exceptions, marketing is often an overlooked, underemphasized area among Guyanese businesses. No matter how attractive your product is to a specific market niche, if that niche is not being properly targeted with branding and advertising efforts, your revenues will suffer. So, constant measuring and research efforts are necessary for your company to maintain accurate targeting and anticipate changes in the target market. A company must always give the customer what the customer wants to buy - not try to tell the customer to buy what the company wants to sell. There is an important distinction in this statement that nearly always directly impacts your company’s success or failure.

Conclusion

Carefully review all areas of the company with respect to their expense/revenue expectations, and address those areas that are operating at sub-par levels and are not contributing to the bottom line of the company. While success in business is not guaranteed, visionary leadership can certainly improve the chances of survival. The key is that business and marketing models must remain dynamic - open to change.