Seven Financial Habits of Great Companies

August 16, 2021 / Probe Research

The corporate world is a tough world with very high mortality rates and mediocre outcomes despite the best of intentions. Very few companies reach the very top cut of ‘true greatness’. Much of the true greatness can be seen in the financials of these companies, which in a sense is the quantifiable and measurable outcome. Our analysis shows that the following are some of the key business drivers these companies focus on – and something you can focus on too.

1.Consistent Growth :

Truly great companies have been around for a while, well over a decade or two, and have shown consistent growth. Consistency shows that the company is on top of its game and it is able to grow in a continuous and calibrated fashion. Growth is also necessarily above average. This also shows that the company has found its ‘Product-Market-Fit’ and it is addressing a very large opportunity. 

2.Ability to find new customers and reach new markets :

Great companies have processes to systematically find new markets and new customers. Competition is part and parcel of free markets, whereas these companies stay ahead of competition by consistently finding new markets and customers to serve. 

3.Prudent Use of Capex :

If Cash Flow is King, Capex is the enemy. Many great companies have managed to build large businesses, but with significantly lower fixed assets. Outsourcing is a key tool in reducing capex requirements. Why spend on capex, when you can outsource far more efficiently.  

4.Collecting money from customers promptly :

As they say, a sale is not completed till you collect money from your customers. Delayed customer payments is a great drag on your cash flows. Couple of bad customers, leading to bad debt, can eat away all your profits for the year. Work with customers who will pay you on time.

5.Reduced inventory levels :

Inventory is one area where cash can get locked up for ages. Management themes such as ‘Just-in-Time’, etc focus on reducing inventory levels and improving inventory turns. Not only does inventory  lock up funds, but also any obsolescence or change in prices leads to write down of inventory. Excellent companies have best in class inventory turns in their respective peer group. 

6.Stable suppliers / partner ecosystem :

All great companies need to work with suppliers and partners. In order to be great, you also need to work with highly efficient and quality conscious suppliers and partners. Before onboarding a supplier, do check their financial credentials to check if they are managing their business well. 

7.Industry leading margins : 

One result of doing all the above well is higher margins. Great companies do consistently have industry leading margins. Benchmark your margins with industry average margins and you will notice superior companies leading on all counts. 

As someone leading a company or on the board of a company, it is important to benchmark key business metrics of your company with its peer group and set goals to keep improving over time.