The Great Game of Business – Chapter 8 section 3 (part 16 of 17)

Month Two: Figure Out What to Do with the Cash; Zero in on Bonus Goals

As soon as you have all the numbers for sales, production costs, and other expenses, you can put together an income statement for the coming year. Break it down month by month, so that you can see exactly what you expect to do and when you expect to do it. From the Income Statement, you can construct a preliminary Balance Sheet and Cash-Flow Plan, which you can then use to focus the discussion about cash.

We generally do this in December. We draw up a set of pending financial statements and present them at one of the staff meetings. We say, “Look. If we execute this plan and meet our standards, we should be able to generate this much cash. What do you think we ought to do with it?”

At this point, you have to start making some decisions. Use the Balance Sheet as your guide. It will show you the different places cash can go. For example, how much do you want to put into plant, property and equipment? … The answers to such questions will serve as the basis for your capital plan for the year, which should also be broken down by month so you can see when you’re spending the cash, as well as how muchand what for.

You should have an inventory plan. … Wherever cash can go, you need a plan. Understand that I am speaking here only of categories on the balance sheet – assets and liabilities – not of expenses and costs that show up on the Income Statement. In your business, you may spend a lot of money, say, on entertaining customers, but you should already have taken those expenses into account in putting together your projected income statement. At this point in the planning process, you are really figuring out how you want your balance sheet to look at the end of the year. If the cash you’ve generated is tied up in buildings, equipment, and inventory, it won’t be available for bonuses, dividends, buying back stock from people, paying off debt, whatever. That doesn’t mean you shouldn’t increase inventory or invest in buildings. … By all means, do it. But how you spend your cash should be a conscious decision.

The money shouldn’t disappear just because no one is paying attention. And believe me, it will disappear. Not that people will steal it (although theft is a lot more likely if you don’t have a plan). Rather, the cash will be spent on things you didn’t really want and don’t really need.

Decide in advance where you want the cash to go. … There are only so many possibilities. … Come up with a plan based on your real needs in each area. Once again, make sure you get a lot of input from the individuals affected – the warehouse people, the engineers, the men and women who are using the machines, their supervisors and department managers. They are the ones who will have to live with the consequences of the decisions.

Keep your project Balance Sheet and Cash-Flow Statement in front of you while you’re figuring out what to do. In December and January, we continually play with both of those statements, calculating and recalculating the numbers to see what effect different plans will have. … If cash looks tight, … we may consider choosing a bonus goal aimed at increasing our liquidity.

In fact, there is a close relationship between our decisions about how to spend the cash and what to target in the bonus program, since both must take into account the long-term health of the company. Before we make those decisions, we want to have a consensus about our wants and weaknesses.

Month One: Decide on the Bonus Program; Submit the Final Plan

There are, as I noted in the last chapter, two types of goals in the bonus program – one from the Income Statement and one from the Balance Sheet. … We spend a lot of time thinking about our weaknesses before deciding what our goals will be.

The weaknesses are a threat to job security. … So how can you minimize the danger? One way is to use the bonus program. … Target your goals to shore up your weaknesses as a business. Of course, you’re never going to eliminate weaknesses. … We do that, first, by identifying the factors that pose the biggest threats to job security, and then by selecting bonus goals that keep everyone’s attention focused on wiping out those threats. … We are putting a bounty on our weaknesses each year.

The first step, obviously, is to identify the threats to your business. That’s actually quite easy: ask your people.

What does the company do badly?

Where is it vulnerable to competitors?

What are the dangers they see in the economy?

How might the company be at risk?

To turn a threat into a bonus goal, however, you have to go a step further and quantify it. You have to come up with an absolute measure that leaves no room for doubt as to whether or not a goal has been achieved.

This is the main reason we have never made quality a bonus goal, although it always appears on our list of potential threats. We can’t figure out how to measure quality so that the results wouldn’t be subject to manipulation. … In many cases, of course, the real challenge is to figure out how to quantify a target that everybody agrees is worth going after. The process is the same one described in Chapter 6, when I discussed the art of quantifying as it applied to developing standards and benchmarks. … Once you know what people are concerned about, and what they want, you look for the benchmarks for which they can aim.

But to do this, you must completelythrow open the goal-setting process and let people choose their own goals. Then you can spend the rest of the year talking to people about not letting themselves down.… They’re not doing it for you. They’re doing it for themselves. .. Your role is to help them succeed. … For us, the selection of the Stop-Gooter goals is the culmination of the entire process of developing an annual game plan.

That happens in January, the final month of our fiscal year. By then, everyone in the company has had a chance to talk about the various goals under consideration, and we’ve reached a consensus about two or three. We’ve also played with the numbers enough to figure out the appropriate levels and payouts, as described in Chapter 7. So we put together the compensation plan, which is the last section of the game plan. The various sections go into a big, black, three-ring notebook, affectionately known as “The Bible.”

THE EIGHTH HIGHER LAW IS: When People Set Their Own Targets, They Usually Hit Them. 

The final step is to submit the plan to the board of directors. They do another round of what-ifs. Where are the contingency plans? Where are the trapdoors? What if this doesn’t work? What if this doesn’t happen? We go over the checks and balances. We reexamine our internal controls. We make sure we have everything set up to run the right way. Then we launch the plan. We come back in the last week of the fiscal year and say, “Okay, here’s the new game.”