While sitting with a client recently, we needed to solve a problem – they needed aluminum cans. Production was being constrained by the lack of aluminum cans available for this beverage manufacturer. Their supplier said the constraint resulted from more prominent players, such as Coca Cola and PepsiCo, gobbling up the supply.
We wanted to verify this. To do this, we started looking through Coca Cola’s most recent financial statements. Sure enough, we discovered that Coca Cola’s inventory had increased by 3.5% since December.
The increase in inventory may not seem significant. We saw that Coca Cola’s sales were down 28% in Q2 compared to 2019. In other words, inventory was up, but sales were drastically down.
The research was not complete
Coca Cola also disclosed that the majority of their increase in inventory was in raw materials and packaging.
With the finished goods down by 7%, the increase in packaging was greater than we noted earlier.
My client’s revenue is just a small sliver of what Coca Cola’s. But look at all of the relevant information we found. The largest soft drinks producer in the world’s revenue was down by 28%. They are stockpiling inventory, specifically aluminum cans and other packaging.
Lastly, we learned how Coca Cola accounted for the costs of goods sold. There were costs that my client included in the costs of goods sold that Coca Cola didn’t. You might think this is just a reporting issue, but there are real-world implications. My client is just months away from looking for additional outside investment. Many of the investors will be very familiar with margins in this industry. We need to make sure we are aligned with other industry participants in how our financial statements are reported.
It had been a few years since I did a similar exercise. Earlier in my career, analyzing public company financial statements was a regular part of what I did. In the past few years, I rarely looked at public company filings. But this exercise reminded me of the treasure trove of information available.
Case Study – Waste Management
I recently started virtual CFO services for a waste collection client. To learn more about the industry, I reviewed Waste Management’s (WM) recent public filings.
One fascinating area to read in the annual 10-K reports is management’s discussion and analysis (MD&A). This is a great area to learn the general lay of the land. While there won’t be any competitive secrets, it does often discuss some strategies the company is undertaking. While most public companies have resources smaller businesses don’t, that doesn’t mean these strategies can’t spark ideas.
The MD&A shared that 20% of Waste Management’s employees were in administrative and sales positions. For my newest client, that gave me a benchmark to start evaluating their staffing. The analysis provided information about insurance premiums and limits that arms me with data to review my client’s policies.
What else did I learn?
My client had long ago started converting their trucks to run on natural gas. However, reviewing the 10-K showed what percentage of trucks WM had converted to natural gas and their anticipated savings from that conversion. This is an important benchmark that my client can use.
Management also discusses operating, sales, general, and administrative expenses. These again serve as essential benchmarks as I am reviewing my client’s financial statements. The discussion in the document let me know the general industry conditions and discussion topics for our next strategy session.
There are so many vital metrics. For instance, the amount of cash flow being generated compared to operating revenue.
Most businesses that are growing will be looking for investment from outside investors or obtaining financing from banks. Those businesses’ financial statements must be consistent with industry standards. Looking through Waste Management’s financial statements helped me reclass and evaluate their financial statements to be more consistent with industry standards.
Waste Management’s report was better than others because it went through so many expenses and discussed why they had increased or decreased. For instance, Waste Management disclosed that their repair costs had increased partially due to increased third-party providers’ costs due to inflation.
Lessons For Business Owners
Too many business owners dismiss information from larger competitors. I have heard how this information does not apply to them because they are “so much larger.”
As a business owner, you have to be looking for advantages over your competitors. One of the most significant advantages one business can have over another is information. Reading through financial statements and a discussion from a business’s management on their results should be eye-opening, no matter their size.
Much of what can be gleaned from this sort of review might not be directly applicable to a business. However, as evidenced above, there are so many bits of information that can help a business owner determine their strategy and benchmark their operations.
About Krieger Analytics
My name is Matt Krieger, and I am the founder of Krieger Analytics, an accounting and advisory partner for small businesses and franchisors. Our goal is to completely outsource your accounting department from bookkeeping and taxes to CFO advisory services. I am also the owner and franchisor of a concept called Monkey Bizness, in Denver, Colorado.
As a small business owner with a background in finance and strategy, I realized the benefits that a CFO could bring to smaller organizations. Most franchisors and small business owners don’t have a need (or budget) for a full-time CFO or bookkeeper. To better fit my clients, Krieger Analytics is a part-time resource. While most think of CFO’s being involved in finance and accounting (we are), we are also involved in much more. We partner with clients by coaching, giving them clarity into their business, and creating growth strategies. Conversations are free, so don’t hesitate to reach out to me at firstname.lastname@example.org.