Scope of engagement: Project operated by full-time CFO
Dates: Early-to-mid 1990s

Bryn-Awl (B-A) was a highly leveraged heavy asphalt & paving contractor with three asphalt plants located in the Baltimore/Washington DC area. It had major heavy-equipment fixed assets, $50 million in annual revenues, 15% regional market share, approximately 400 employees, and approximately $15 million in debt and bonded obligations. Customers were primarily real-estate developers and governments with new highway construction and repair-and-maintenance contracts.

In the early 1990s the paving industry experienced a 70% downturn during a 24-month period due to a general construction and real estate recession and a government public-works moratorium (which shut off $1 billion in appropriated construction funds for new projects). The industry went from 15 million tons of hot mix to 3 million in less than two years, & the company experienced huge operating losses that required personnel layoffs and rigorous cost cutting.

The entire paving industry experienced severe competitive pressures and the market value of its equipment assets fell far below their nominal book value. The auction blocks were flooded with heavy equipment so liquidation to raise cash and reduce debt burden was not an acceptable option. For example, B-A's newest asphalt plant was 100% leveraged at a cost of $2.5 million and its recoverable value in the recession was estimated at $250,000.

The owners and managers of B-A had been focused almost exclusively on profit and new business, and were not oriented to relate financial results to their operating practices. They were essentially helpless in this situation, and conventional measures such as layoffs, selling unused assets, and reducing inventory, although helpful, were not adequate to assure survival.

To escape this impasse, the Chief Financial Officer of B-A used three-bottom-line software (the Financial Scoreboard, also known as the Mobley Matrix*) to model the business and run "what-if" scenarios to determine a survival path to take. He began using a direct cashflow statement so he would know the exact cash position of the business at any time, and began to identify significant sources of cash in B-A's contract receivables. The CFO discovered that he could liquidate those (& other) receivables faster than the company's total equity was shrinking.

B-A's banks were concerned about its ability to meet the scheduled payments on its $15 million debt. The CFO was able to convince them that through the use of the Financial Scoreboard the company could meet its financing commitments by managing its balance sheet and disciplining its operations. For the next 2_ years he was able to "mine" B-A's balance sheet, focusing mostly on the existing contract receivables as a source of cash. He re-negotiated the banks' payment terms, met all the payment dates, and kept the company operating.

Another breakthrough came when B-A formed a Performance Measures Team that included the line engineers and project managers coming together to discuss the internal means for the company to improve its cashflow. Balance-sheet management and collections have traditionally been considered functions of the "accounting department."

Use of Performance Measures (identifying and using Key Performance Indicators -- KPIs**) and the Financial Scoreboard (applying three-bottom-line tools) involves appropriate parts of an entire company in building awareness and consensus about how to make changes in their behavior to obtain better cash management and other financial results. Since one cannot manage results (and one can only manage behavior by managing the systems by which people produce results), managing behavior change using these systemic tools is an effective way to generate better financial results. Having the financial data available in an easy-to-understand visual format made it possible for the Team to develop and share meaningful KPIs, and to use them in daily operations to regulate expenditures and improve cashflow.

In B-A's case, to cite just one example, it had always been the practice of the company's paving crews at the end of a job to empty leftover asphalt from its paving-machine hoppers onto the job site. The developers who were the company's customers would not pay B-A until they saw a job was completely cleaned up, and the piles of asphalt were often not removed for months (and at significant additional direct expense to the company).

Despite numerous attempts by management to change this behavior, the crews never understood its implications. Until they recognized it through the three-bottom-line tools & the Performance Measures meetings, the foremen and project managers had never understood the cashflow impact of their cleanup habits. Once they saw the critical need to collect receivables sooner, they changed their behavior, and receivable days went down dramatically.

Bryn-Awl continued to operate with net losses over a thirty-month period while still generating cash to meet its financing obligations. In the end, the company was merged and the banks and other creditors were made whole on the transaction, while B-A's competitors were filing for bankruptcy and leaving only pennies on the dollar for their creditors.

The Performance Measures tools and processes provided Bryn-Awl five key benefits:

1. The ability to perceive the wholeness of a financial situation and relate the income statement, the balance sheet, the cashflow statement, and the real world of operations more clearly, and to communicate that clarity with its simplified one-page format.

2. The ability to run historical analysis and "what-if" projections on real, not interpolated or accrual-based, cash situations.

3. The ability to identify solutions, both financial and behavioral, to communicate those solutions, and to address those solutions through Key Performance Indicators.

4. The ability to communicate the real benefits of required changes in operational behavior and enroll an entire company in making those changes.

5. The ability to monitor and share both operating as well as financial results and thereby progress toward the goals defined by the Performance Measures Team.

Use of these tools and processes penetrates the "language game" that persists because there is no common ground for understanding the real-world significance of the inadequate conventional financial statements. A Performance Measures Team using the Financial Scoreboard can bridge the cultural, motivational, and behavioral gaps that exist between the different parts of an organization.

It enables a company to directly manage internal behavior by communicating effectively where communication had previously failed, and enrolling all stakeholders in implementing change and achieving desired outcomes.

It enables those stakeholders to share an integrated vision that is based on reality, and supports generating a shared financial future, something that conventional financial statements simply cannot deliver:

[M]ost businesses have two information systems. One is organized around the data stream; the other, far older one, around the accounting system. The accounting system, though, is a five-hundred-year-old information system that is in terrible shape. The changes we will see in information technologies over the next twenty years are nothing compared to the changes we will see in accounting.

We have already begun to observe changes in manufacturing cost accounting, whose roots go back to the 1920s and which is totally obsolete. But that is only for manufacturing, not service. Manufacturing today accounts for 23 percent of the GNP and perhaps 16 percent of employment. Thus, for the vast majority of businesses, we have no accounting that's worth anything.

The problem with service-business accounting is simple. Whether it's a department store or a university or a hospital, we know how much money comes in and we know how much money goes out. We even know where it goes. But we cannot relate expenditures to results. Nobody knows how.

Peter F. Drucker, Managing in the Next Society, 2002

The Performance Measures approach and the three-bottom-line tools enables a company to make grounded and credible projections to build its future. These tools provide us with the beginnings of the ability to relate expenditures to results.

This approach can transform the relationships that currently exist between businesspeople and their bankers, accountants, and investors, and thus bring a dynamic, high-integrity transparency to the business environment and the economy at large.

* In this financial picture, the three bottom lines are net profit, operating cashflow, and return on assets. Effective management of all three is necessary to master a business for reliable success. ** A Key Performance Indicator (KPI) is a non-financial (i.e., behavioral or cultural) indicator that has a direct connection to, or correlation with, financial results.