fiscaldoctor

Think for a minute and consider to what extent you are fooling yourself by managing to a number—instead of consistently making the best decisions for long-term equity growth.

Unfortunately, too many leaders of both public and private companies publicly target specific numerical targets for net income. Once stated, those targets often take on an air of obligation.

So why is this an issue?

Well, in the zeal to consistently reach numerical goals, the organization begins to fall for the temptation to stretch some quarters to reach targets and even to slow down—even hitting the brakes—rather than bringing in too much income above the target number in another quarter.

The result: in their ever increasing focus on attaining short-term numbers, leaders can lose focus on making the best long-term decisions to build value.

Month end, quarter end, and fiscal year end activities can become hostage to this teeter-totter process of getting just enough income—yet not too much income—in the current period. Sort of like Goldilocks tasting the 3 bears’ porridge!

Having been part of year end deal closing crunches, I can assure you that inordinate amounts of time, money, and focus are required to get deals closed in the desired period.

Carried too far, companies then hold ‘fire sales’ to ensure getting the last few sales needed for those target revenues, which results in customers quickly learning to hold off on purchases until the regular desperate overture is made at period end—all to hit the sacred numerical targets. This ends up reducing margins (as well as creating a spiraling impact) as the company continues to try to make upcoming period results.

So, what kind of tone, from the top down, does this obsession with exactly hitting stated numerical results convey throughout the organization?

When you combine this corrosive environment with stress and pressure from the non-economic energies required to reach those targets, ask yourself, “How much does that detract from corporate responsibility to shareholders to consistently build value within risk tolerances and resources available?”

At what point does this corrosive environment create a situation where the organization drinks its own Kool-Aid?  Yes, it begins when the organization starts losing track of real balance sheet and operating information needed to make the best decisions.  The closer to customer facing activities this incorrect data reaches, the more likely it creates operational inefficiencies.

As a result, the company owner, leadership team, or staff will likely run afoul by having to manage wasted energy needed to hit those numbers, rather than building equity and long-term wealth.

What’s your next step to avoid these hidden fiscal dangers?  Below are 3 options to help keep you on track:

1.  Target a numerical range, not an exact amount.

2.  Change or adapt incentive programs to emphasize consistently reaching longer-term goals and objectives.

3.  Change the tone from the top to emphasize doing things right, rather than managing income.

Reflect on the reality this short-term income-oriented behavior runs deeply enough that you require a fresh set of eyes to see where you are. Then, as you begin to eliminate non-economic activities, everyone can come out a winner!