Book Summary – Corporate Canaries – Avoid Business Disasters – Written by Gary Sutton

Gary Sutton is a business turnaround expert and this little book is packed with great material. If you are interested in business or have a business, then this book needs to be on your desk. Use it as a business desk reference. I’m a strong believer in “inversion” which means studying the opposite of things. If you want to be successful, study success and failure to really understand the full spectrum. Gary’s book outlines 5 key early warning signs that are similar to blood pressure, insulin levels, cholesterol and heart rate for physical health.

Why is this important to me?

There are several reasons you must consider that make this book so important. Are you an employee? If yes, then you need to read this book. The early warning signs ensure your business is solid. Enron employees thought their money and pensions were safe. As we all know, this was not the case. One of the key principles regarding debt would have given them the knowledge to make a change before they lose their entire pension.

Do you own a business? If so, then you must understand all of the principles outlined in the book. You have a fiduciary responsibility to ensure your business is sound for everyone involved. This is important as they depend on you and it is important to understand these early warning signs so that you can make the necessary changes.

Gary uses his miner grandfather’s advice to outline the 5 main problems to avoid. I’ll focus on the 5 without the story, but understand that miners used to use canaries to spot a gas leak. So if the canary died, they knew they had to evacuate the coal mine. We will now go into each of the 5 principles:

1. You can’t beat losses – You see this time and time again when short-term Wall Street-oriented companies focus on top-line growth regardless of profits. That’s a bad idea. Mergers of two mediocre companies with revenue growth will only create one big mediocre company that will waste money.

Early warning signs are:

1.) If the company’s sales have grown twice as fast as the net profit for three years

2.) The sales force is commissioned by volume, regardless of profit.

3.) Hallway calls are about sales, not revenue.

2. Debt is a Killer – This point is nebulous, but Gary gives a good indicator of when debt is too much. If you’ve seen any of my other round-ups then you know I’m a big fan of OPM (Other People’s Money) to use good debt to buy cash flow assets. That being said, too much debt can kill you in bad times.

Early warning signs are:

1.) Debt to equity exceeds 1:1

2.) Devices are always leased, never purchased

3.) Executives spend more time with bankers than with clients.

3. Fools fly blind – This has to do with financial controls. If these are sloppy, nobody knows where the business really is. This is a killer because operational P&Ls take too long to distribute or worse, they are not even used as tools. Even if larger companies focus on revenue and earnings per share but have no idea if they have enough cash to cover payroll.

Early warning signs are:

1.) Audit adjustments are more than 1% of sales or 5% of profit.

2) The books do not close within two weeks after the end of the month.

3.) If you ask employees where the company makes the best profits, no one knows.

4.) There are no leading indicators for sales.

4. Every decision beats no decision – “analysis paralysis” kills innovation and speed. These two factors separate market leaders from all others. When people are afraid to make decisions or spend too much time covering their own butts, it exposes deeper organizational issues and poor leadership. These behaviors create bureaucracy, inefficiency and ineffectiveness. Check out my summary of how the wise choose to overcome this bad behavior.

early warning signs:

1) The mission statement tries to say many things to many people (Wishy-washy)

2) Brochures and advertisements do not provide specific and meaningful benefits to buyers

3) Employees, customers and suppliers give different answers when asked what the company does best. leadership has failed. Inconspicuous companies are dying.

5. Markets Grow and Markets Die – Business leaders need to recognize when markets are dying. If they don’t, the reinvestment brings “falling returns”. Basically, this means that the company will die by a thousand cuts. In the book Good to Great, Jim Collins describes Kimberly Clarke’s entry into the consumer paper business and exit from her traditional business. They had to sell the mills. This was a big decision that worked but can be very difficult because you have an established business making money. I can confirm number 5 because it happened in my own company. We’ve had to reinvent ourselves twice in the 14 years that I’ve been working on this. There are types of businesses that are more successful and easier than others. This is worth studying in and of itself, and I will profile business types in future summaries.

early warning signs:

1) Sales have fallen for two years in a row.

2) Competitor sales have fallen for two years in a row.

3) Nobody makes money.

In summary, Corporate Canaries is a must-read book. The lessons are critical as you strive to build a business, and the lessons can be applied to your personal finances as well.

I hope you found this short video summary useful. The key to any new idea is to incorporate it into your everyday life until it becomes a habit. Habits are formed in just 21 days.

One thing to take away from this book is to keep your debt to equity ratio below 1:1. This is difficult for most people because they have the debt and no equity. With daily discipline and simple daily changes, this can easily change.