April 2003

BankNotes A timely information and

idea statement

Inside:
The importance
of strategy Are your
lenders taking a
Strategy — not operational effectiveness — distinguishes critical look at
winners from losers. In fact, strategy is more important than
ever, particularly for organizations that want to differentiate cash flow?
themselves from others.

However, it has been a bad decade for strategy. Companies FDIC’s new
bought into an extraordinary number of flawed or simplistic
ideas about competition. Executives won’t admit it, but
Money Smart
typically their “strategy” has been nothing more than program helps
producing the highest quality products and services at the
lowest cost. Clearly, this is not a strategy — but instead an build money
attempt to improve on best practices. management
Strategy is difficult. It’s about making tough choices and trade- skills
offs and deliberately choosing a different route. In contrast,
operational effectiveness means doing things you need to do.

It is incredibly arrogant for a company to believe it can deliver

the same product as its competitors and actually do it better
for very long. What’s worse, a focus on operational
effectiveness alone creates a mutually destructive form of
competition that results in customers choosing products and
services based solely on price.
Strategy, continued on page 2

| Bank Notes

Bank Notes is a publication of RSM McGladrey, Inc. ©2003

 Strategy, continued from page 1
It starts at the top
Sound strategy starts with the right goal. If your
goal is anything but profitability — to grow larger
or faster, for instance — you’ll have problems.
Strategy must also have continuity. It is about
the basic value you’re trying to deliver and the
customers you are trying to serve.
But in order to successfully implement strategy,
an organization must have a strong leader who’s
willing to make tough choices and define trade-
offs. That doesn’t mean the leader needs to
invent strategy. The ability to provide the
discipline and glue that keep such a unique
position sustained over time is far more critical.
The leader has to be the guardian of trade-offs,
but at the same time understand there is
nothing rigid or passive about strategy.
The leader also has to make sure everyone
The importance of strategy
understands the strategy. The best CEOs spend
their time teaching strategy. These CEOs visit
with their employees, suppliers and customers
and repeat, “This is what we stand for.”
So everyone understands the corporate
strategy. Employees know what choices to
make. Suppliers understand their customers.
And customers understand what to expect.
The organization moves forward in a disciplined
manner that provides a unique value to
its customers.
Changes in the air
Strategy hasn’t changed, but change has. In
today’s corporate landscape, change occurs
more quickly, so companies have to behave
schizophrenically. On one hand, they have to
maintain continuity of strategy. But they have
to remain very focused on continuous
improvement, too.
Bank Notes |
Bank Notes is a publication of RSM McGladrey, Inc. ©2003
Southwest Airlines, for example, has focused its
strategy on serving price-minded customers
who want to travel from destination to
destination on relatively short, frequently
offered flights with minimal service. That has
stayed consistent over the years, but Southwest
has also aggressively assimilated every possible
new idea to deliver on that strategy.
Technology may change, but strategy won’t
Sometimes the environment or your customer’s
needs shift far enough so continuity doesn’t
work and your initial positioning is no longer
valid. But, those conditions occur infrequently
for most companies. In fact, most companies are
still waiting for that new technology that
promises to change everything.
Two years ago, Fast Company magazine reported
the Internet was an incredibly disruptive
technology that was going to transform virtually
every industry. However, we’ve discovered the
Internet is not disruptive for all parts of the
value chain. In fact, companies are now using
the Internet to complement traditional
technologies and leverage existing strategies.
So what can we learn from analyzing actual
competition? Winning companies are anything
but simple. Strategy is complex. The good
news is that even successful companies almost
never get everything right up front. Most
successful companies start with only a few
pieces and formulate their strategy over time.
The kernel of strategy that’s discovered
up-front is the essential
piece. That’s the antidote to
complexity.

John P. Owens is a
director with RSM
McGladrey. For more
information, contact him at
john.owens@rsmi.com.
Are your lenders taking a critical
look at cash flow?
Character, credit, collateral and cash flow are principal
factors in lending decisions. You place significant
emphasis on all four, but is your analysis of cash flow
falling short of expectations? Even though the statement
of cash flows provides a wealth of useful information,
you should understand its implications in the context of
the company’s business and other financial statements.
Believe it or not, a positive net income does not
guarantee a borrower will actually have cash available
to repay your bank’s loan. Products or services sold on
credit or with extended payment terms don’t generate
immediate cash flow. Funds invested in property or
equipment use cash, but don’t generate a recorded
expense equal to the amount of funds used.
In particular, fast-growing companies often have the
most difficult time with cash flow. Sales increase rapidly,
so accounts receivables also climbs. At the same time,
the company’s need for inputs like raw materials and
payroll also increases. Although net income climbs, the
company struggles to make ends meet from a cash
flow perspective.
Conversely, companies with shrinking sales often have
positive cash flow. They collect receivables at a faster
rate than sales. In addition, inventories of raw materials
may also shrink.
Cash flow from operations is also important, but make
sure you don’t ignore the details. Understand why
operating cash flow is positive or negative. Carefully
consider whether “one-time” events occur frequently.
Bank Notes is a publication of RSM McGladrey, Inc. ©2003
For example, purchasing property and equipment seems
like a one-time event, but many companies need to
spend a certain amount each year to update, upgrade or
increase property and equipment.
Trends in cash flow are important, too. For example,
constantly offsetting increases in accounts receivable
and accounts payable may indicate a company is relying
on its suppliers to finance growth in receivables. When
receivables grow significantly faster than sales, ask
about payment terms offered to customers. No money
down and no payments for a year are great terms for a
consumer, but don’t generate immediate cash flow and
may be difficult to collect for the lender.
Non-recurring items aren’t always evident from the
statement of cash flows so you may need to analyze
the income statement to find them. For example, a
payment to settle a lawsuit shown as an operating
expense may not be itemized separately in the
statement of cash flows.
Check the balance sheet for items other than
receivables, payables and inventory that may affect
cash flow. Does the company capitalize items, such as
software upgrades, that might be considered
operating costs?
In addition, consider the discretionary timing of cash
flows. Deferring payment of a major obligation until
immediately after year-end would have a positive
influence on cash flow. Conversely, prepayment of a
major obligation would have a negative impact.
Finally, determine how well the company manages its
overall cash flow. Does the company meet its obligations
on a timely basis? How does the company manage its
cash balances? Understand the company’s sales and
receivables collection policies and how they are
managed. Lending to a company that manages its cash
well should improve your chances of repayment.

| Bank Notes
Editor: Arik C. Hanson
Bank Notes is published by RSM McGladrey,
Inc., a firm that offers middle-market
companies business and tax consulting,
wealth management, retirement resources,
payroll services and corporate finance.
Odds ‘n’ ends
Information provided in this publication
has been obtained by RSM McGladrey, Inc.
from sources believe to be reliable.
However, RSM McGladrey, Inc. guarantees
neither the accuracy nor completeness of
any information and is not responsible for
any errors or omissions or for results
obtained by others as a result of reliance
upon such information. This publication
does not, and is not intended to, provide
legal, tax or accounting advice. Special
attest services are provided through a
professional services agreement with
McGladrey & Pullen, LLP.
Send comments or suggestions to
arik.hanson@rsmi.com. For additional
copies or change of address, please call
Jennifer Torrence at 563.333.2218.
For more information on these stories,
visit www.rsmmcgladrey.com/banknotes
© 2003 RSM McGladrey, Inc.
April 2003
Printed in the U.S.A.
www.rsmmcgladrey.com
The FDIC has developed a Money Smart curriculum to help adults enhance their
money management skills, understand basic financial services and build their
financial confidence to use banking services effectively. Money Smart is comprised
of 10 comprehensive instructor-led modules covering basic financial topics including an
introduction to bank services, tips on obtaining credit and buying a home. The FDIC
makes Money Smart available to banks at no cost.
As of Sept. 30, 2002, the FDIC insured 9,433 financial institutions — 287 fewer than Sept.
30, 2001. However, insured assets increased to $8.283 trillion from $7.854 trillion during
that same time.
A total of 1.58 million bankruptcies were filed in 2002, an increase of 5.7 percent over
2001. Most (97.6 percent) were not business related.
The Russell/Mellon U.S. Master Trust Universe, a group of 428 corporate, foundation,
endowment, and public funds, declined an average of 9.12 percent last year. Only 19 of
the 428 funds had positive returns in 2002, the worst year for trust funds since 1987.
A national survey disclosed many consumers are unsure about which ATMs will accept
their ATM and debit cards. ATM signage may be incomplete or confusing. The truth of
the matter: almost any ATM will accept any ATM or debit card.
Most industry analysts expect bank technology spending to increase slightly this
year. Key components of technology spending will be security and risk management,
electronic payment technologies, branch technology, and wealth management
software. The USA PATRIOT Act is the driving force behind security and risk
management spending. Expected legislation will allow checks to be truncated and
cleared using digital images instead of shipping paper, providing the basis for
electronic payment technology spending.

Bank Notes is a publication of RSM McGladrey, Inc. ©2003