Many business owners have outside investors that have put money into the company with the expectation of turning a profit on their investment. But businesses don’ always run smoothly and sometimes the CEO has to report bad news to their sources of funding. Is there a way to do it without having those sources lose faith in the person they’ve entrusted with their capital?
It’s the same with large public companies when the CEO has to downgrade a previous estimate of performance. Sales don’ always meet projections and earnings may not be as good as anticipated for any number of reasons. At these times it’s essential to get the news out quickly and not try to keep a lid on the situation. The longer things are kept under wraps the worse the CEO’s performance will appear to the shareholders and the media.
There’s an element of optimism in most company forecasts, regardless of the size of the enterprise. In fact, entrepreneurial businesses demand an optimistic leader or they wouldn’t have been started in the first place. When there’s a need to raise capital to either start or grow the business this optimism is usually the reason the money’s required.
That’s not to say it’s a good idea to overlook the possibility things may not work out as planned. There’s always a risk for investors and it’s best to present this realistically when the capital’s being raised.
It’s also wise to have a plan prepared just in case there’s a downturn in the performance of the business and changes have to be made in the way it’s being run. Planning ahead for a rainy day means you’ll enjoy the sunshine even more. The one thing investors won’t appreciate is getting bad news while they watch the business they’ve invested in continue to do what it’s been doing and lose more of their money.
When things aren’t going as well as expected there are four basic rules that the CEO should follow when communicating the bad news to investors.
Rule Number One — Don’t Delay
Procrastination is the worst thing a CEO can do. Bad news should be reported as soon as possible. Delaying the inevitable only creates suspicion and makes it seem like the facts are being concealed.
Rule Number Two — Know What’s Gone Wrong
The CEO had better be able to tell investors why the results deviated from the plan. Was it changes to conditions in the marketplace that hadn’t been anticipated? Was it the loss of a key customer? There’s always a reason and the person at the top should know what it was.
Rule Number Three — Know What to Do About It
The CEO is responsible for coming up with a plan to fix things. There has to be a workable strategy that will get the company’s performance levels back to what the investors expected when they put their money into the business. This isn’t just a “quick fix” by any means; slashing people and expenditures for the sake of a better bottom line is simply an admission of failure and not a solution.
Rule Number Four — Build a Model for the Future
What will be the outcome of the corrective steps taken? What will it do for the metrics of the enterprise? This has to be shown in a financial model of the business that will demonstrate to investors that the strategies employed will work. This model has to stand up to scrutiny from these investors who want to know their investment is safe and will in time generate the returns the CEO has promised.
Remember too that those investors are usually there to help if need be. Their knowledge and business acumen can be tapped if things get tough and they can become an invaluable source of assistance for the very best of reasons; they sincerely want the enterprise to succeed because their money’s on the line.
There are two elements of all this that are fundamental to running a business — honesty and reality. The CEO has to be honest with the investors and keep them in the picture. There’s also a need to be realistic and not let optimism get in the way of accepting the situation so it can be dealt with appropriately.
Nobody likes reporting bad news, but unless something’s done about what’s caused it there’s an absolute certainty that things will get worse.
Copyright 2005, RAN ONE Inc. All rights reserved. Reprinted with permission from www.ranone.com.
Chris’ combination of academic credentials, career experience and temperament ideally suit his calling as a business development advisor. Clients say he has a mind for business and a heart for service.