Ning Gaoning: Problems in operation and management are caused by a lack of deep understanding of the

Introduction: The

financial numbers are the mirror image of the enterprise, and the "three tables" constitute its core. The logic of the three tables is interconnected, and no matter which table you start with, you can find the problems of the enterprise. The problems in business management are not profoundly aware of these three tables.

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Estimated reading 7 minutes

How important are numbers in human society? How important are numbers in a business? Financial accounting is the digital performance of an enterprise and is a digital mirror image of the enterprise. You can see the whole business in one set of numbers, even more comprehensively and clearly. That's the power of numbers. Therefore, in business management, numbers should be fully respected, numbers should be feared, and digital management should be applied.

I often wonder if I can extract a part of the consensus and conclusive from all the theories of enterprise management, which can be applied to different scenarios. Come to think of it, these rules come mainly from the financial side.

Speaking of the core system of finance, it is what we often call the "three tables": balance sheet, profit and loss statement, and cash flow statement. The three tables are indeed the inventions of intelligent geniuses, and they are constantly being revised, improved, and improved every day. The three tables use numbers to clearly express the overall picture of an enterprise from one point, one dynamic range, and one business quality and risk.

▲Ning Gaoning is a teacher, sharing in the teacher's workshop "Ning Gaoning's Private Class"

Balance sheet: Balance sheet

The first of the three financial tables is the balance sheet. The first concept of the balance sheet is balance, which is the balance of increases and decreases, the balance of imports and exports, and the balance of structure. The concept of corporate financial accounting was introduced from the West. If the balance sheet we are talking about is translated literally, it should be called a balance sheet. "Assets and liabilities" refers to content, while "balance" refers to relationships. This is very different.

In addition to balance sheets, you can see the structure, asset and liability structure, equity structure, liability composition, cash ratio, receivable and inventory ratio, current and fixed asset structure, etc. These structures are changing, and your job is to expand this table and refine these structures almost every day. And just like other philosophical concepts of change, these expansions and structural changes are not absolute and all have degrees. For example, more assets are not better, it depends on asset quality and profitability; liabilities are not better, as less debt means less leverage, and shareholder funds cannot be fully utilized; more cash is not better, as too much cash will reduce asset returns; accounts receivable cannot be too large, otherwise it will occupy funds, reduce turnover rate, and also bring the risk of bad debts, but It cannot be too little, otherwise it may affect the sales scale; of course, the inventory cannot be large, but if there is no appropriate inventory, customers may not be supplied in time and customers will be dissatisfied; everyone likes shareholder funds, but too much shareholder funds will reduce the return on net assets; although depreciation and amortization reduce profits, they also reduce taxes and increase cash flow. All of these are degrees, and you have to grasp the best degree and the best balance among them.

The examples that I have encountered that have had a big impact on the balance sheet are the acquisition of Syngenta and the merger of Sinochem Group and ChemChina. The acquisition of Syngenta cost 43 billion U.S. dollars, all financed by debt. After the merger of the "two informatizations", the total assets were 1.6 trillion yuan. Suddenly the balance sheet tripled, the entire structure changed, and if you looked at the digital image, it was completely unrecognizable. They became two completely different companies. Not only has the scale changed, but the asset structure has also changed. It can be said that the balance sheet shows a completely new strategic change.

Industrial, technical, and international assets have greatly increased. But at the same time, the debt ratio has increased significantly, financing costs have also increased significantly, depreciation and amortization have increased several times, inefficient non-performing assets have increased, and equity attributable to parent shareholders has decreased significantly due to amortization. Looking at this balance sheet statically, the new China Sinochem Holdings is facing difficulties and challenges. It can be said that there is a structural failure and too much leverage. What it urgently needs, and is also very challenging, is to fully activate this balance sheet, bring it into play, increase capital, increase profits, and adjust and improve it in operations.

How much potential do the assets in this new balance sheet contain? How much value can assets create after strategic transformation? How can the problems in this balance sheet be resolved?

Quiet and vivid: Profit and Loss Statement

Faced with these problems, we have to enter the second table - the Profit and Loss Statement. The assets that the balance sheet mainly looks at are static, and its changes are realized through the profit and loss statement, that is, dynamic operations. The most critical factor here is the introduction of human initiative and creativity. Dynamic people and team management capabilities are introduced on the basis of assets and liabilities. The numbers in the income statement can express many things. These numbers include market, competition, customers, products, brands, costs, quality, logistics, turnover, depreciation, amortization, gross profit, and net profit. Each item is accomplished through the efforts of business managers. If the balance sheet is a battlefield layout, the income statement is a war.

▲Ning Gaoning is a teacher, sharing in the teacher's workshop "Ning Gaoning's Private Class"

The first line of the income statement, sales revenue, is often called the top line. Sales revenue or turnover is the most frequently mentioned and watched figure. The size of an enterprise and its ranking are almost all based on this line. The size of a company will also bring huge profit potential, so the goal of many of our companies today is to pursue growth in the top line and to become a company with a large turnover.

However, the problem also arises from this, because there are many factors that need to be balanced here. This method of breaking down problems is applicable to business management. Is the turnover the turnover of the main business? Is the turnover of the main business the turnover of strategic products? Is the gross profit margin on turnover good? Does turnover represent an increase in market share? Does turnover represent an expansion of market scope? Does turnover represent technology product upgrades? How much promotion and how much accounts receivable does turnover represent? These questions must be answered professionally. Otherwise, rapid growth in turnover may be unhealthy, or the strategy may be wrong.

As mentioned earlier, the merged Sinochem China on the balance sheet of the first balance sheet has a brand-new, complex and uneven asset portfolio. How to realize the potential of the asset base on the second sheet according to the requirements of main products, strategically good products, good gross profit products, products with growing market share, and preferably technologically innovative and upgraded products, products with brand and customer loyalty, etc., is a huge challenge and the key to corporate integration and transformation. This requires great efforts of the management team and takes time.

I said that no matter what decision or transaction you make in an enterprise, when you make it, you must think carefully about how it will be expressed in the three tables if it is done. If the three tables do not look good and the problem cannot be solved, the company will have problems. Speaking of turnover alone, in order to achieve the purpose of expanding sales scale, there are many methods and means: price reduction, promotion, advertising, and dealers' stocking up are operational, and there are also strategic ones such as mergers and acquisitions for scale and top 500 rankings. Chinese companies have a strong desire to expand scale at the expense of quality in the process of development. They always think that they can first go large-scale and kill their competitors before making profits. However, they did not expect their opponents to think the same way, so it formed a war of attrition and a protracted war. This is why everyone has seen why the number of Chinese companies in the Fortune Global 500 has exceeded that of American companies, but their profits and listed market value are much lower than those of American companies. This shows the difference in business philosophy. Of course, this also has issues with the company's development time and maturity.

Another unhealthy way to expand sales is to provide large amounts of financing to customers, which means generating large amounts of accounts receivable. When I was in school, my teacher said that some companies create turnover and profits by creating accounts receivable.

It can be said that all industries in China have been deeply affected, from infrastructure projects to fast-moving consumer goods. This approach not only tied up a large amount of funds, hindered cash flow, and increased debt, because if the second table is not done well, it can be "infected" to the first table. The problems on the first table and the third table will add up to produce the so-called "explosion" that is often said today; more importantly, the problem of accounts receivable misleads and distorts market demand. In an immature market, in a customer group whose business reputation is difficult to accurately assess, sales are made through credit, allowing the company to falsely survive in the process of accumulating debt. Therefore, when we look at a company, the so-called sales collection method in its operations is extremely important. Because this is not only sales, but also strategy, market competitiveness, product strength, and risks.

Risk: Cash Flow Statement

The third table is the cash flow statement. It is more meaningful to Chinese companies at this stage, because the problem of most Chinese companies now lies in cash flow, which is often said to be cut off, or "exploded". In fact, there is a problem with payment, whether it is payment to customers or payment to banks. Cash flow is the connection between the first two tables. When there is a problem here, in fact, there has been a problem with the first two tables. The problems have accumulated to this day. There must be problems in the market, sales, payment collection, and various fund occupation problems. Investors, banks, customers, etc. do not want to give you more funds or ask for liquidity support. When many people encounter cash flow difficulties, they want to borrow money to tide over the difficulties. This is right in principle, but the key is to find out the cause of the cash flow difficulties, whether it is local, temporary, accidental, or systemic. As with many of the problems we face, there are deep reasons behind the appearance.

As mentioned before, if the first table is the battlefield layout, the second table is the war, then the third table is the bullets. In other words, if the first table is the human body, the second table should be muscle movement, and the third table should be blood circulation. This table can be said to reflect the quality of the company's development and the risks the company may face.

The question I most often ask when I see a business in a company is: What is the operating cash flow? How much is depreciation and amortization included in the cost? What is the free cash flow? For a new business that is being cultivated, if it makes a loss, is it a cash loss? Or cash flow positive? Or EBITDA positive? This is an important basis for us to judge the development stage of this business. An enterprise is indeed a living entity, and its life characteristics are different at each stage of its growth. The problems in the cash flow statement are indeed like the human body. If there is an illness, the cause may be different. For example, is the amount of cash inflow from operations or from financing? If it is financing, then the liabilities or capital will change. Even if the company does not suffer losses, if inventory receivables change significantly, cash flow will be affected. You have to look at these things clearly. There may be other reasons behind it.

The logic of the three tables is interlocking. The business phenomenon on one table will definitely affect the other table, so no matter which table we start with, we will definitely be able to find problems related to it. When I hold meetings at the company, I often say that it doesn’t matter where you start talking about a problem, because it will have to come back in the end.

In my book "Five-Step Combination Theory", I once said that the systematic, holistic and logical management of enterprises are the key to achieving goals. This is especially true for the three tables in financial management. It is an enterprise composed of numbers. The so-called problems that arise in operation and management are caused by a lack of deep understanding of these three tables.

▲Ning Gaoning’s teaching at the “Ning Gaoning’s Private Class” event in the teaching workshop

People often ask now, what kind of abilities are needed to manage a company well? Some say that we need to have a strategic forward-looking vision, some say that we need to form and lead a good team, some say that we need to continuously innovate technology, and some say that we need to do a good job in operational management, reduce costs, and be competitive. These are all correct, but from a financial accounting perspective, all of these can be expressed in three tables, can be gathered into three tables, and can also be radiated from three tables.

None of the three companies I have experienced, China Resources, COFCO, and Sinochem, have had cash flow difficulties. Their debt ratios have fluctuated from time to time, but they have all been within controllable expectations. Why? In the seemingly dazzling growth with no rules to follow, China Resources and COFCO's multiple investments and acquisitions were carried out under the conditions of strictly controlling the debt ratio and repeatedly forecasting cash flow. They were carried out on the premise of maintaining a debt ratio of about 65% and an interest coverage ratio of about 3 times. If the investment results are good, you can continue to move forward; if the investment does not meet expectations, development will slow down. This principle has been adhered to for a long time.

Later, the company introduced a new dynamic indicator - net debt/earnings before interest, taxes, depreciation - to monitor risks, which is closer to the actual situation of cash flow. However, the subsequent debt situation of ChemChina greatly exceeded these principles. Although the merged China Sinochem Holdings has improved, its debt ratio is still high, which requires the company to pay dynamic attention during operations.

Author: Ning Gaoning

Lingjiao Workshop, former chairman of China Resources, COFCO and Sinochem

Source: Lingjiao Workshop

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