Your balance sheet alone won't tell you if your company is thriving or on the verge of failure. Here's what you really need to look out for.
Years ago, I asked my lead investor how he could keep track of all the companies he invested in. "It's simple," he said. "I just look at the numbers."
But numbers don't chronicle morale, low ethical standards, obsolete technology, or time-consuming politics. By the time the balance sheet reflects these problems, it's too late or very expensive to act. So it left me with the abiding question: how can you tell a healthy company from a sick one?
In healthy companies, employees are highly committed and tend to stick around, so turnover exists but isn't high. More importantly, at healthy companies you see a lot of movement up through the ranks. This reveals people are staying because they're growing, and not because they're afraid to leave. The most striking case of this I've seen is a receptionist who eventually joined the company's board. She was able to do so because business growth created opportunity and because both were encouraged through training and support. She was by no means an isolated case. By the time she was on the board, there was of course nothing about the company she didn't know.
Great companies handle conflict well. Their leaders expect, want, and respect conflict and debate. When challenged, they don't look shocked or affronted because they welcome the engagement that conflict requires. The very best leaders deliberately create structure for conflict: they appoint devil's advocates to challenge mission-critical decisions; they get executives to change places so they can argue from different perspectives. They appreciate that conflict is the mechanism through which organizations do the best thinking, and can only do so by being good at it.
Companies that require face time and measure commitment in hours burn people out. If you see employees stay late (but they're not very busy), or if staffers regularly assume that everyone will work through weekends, you have a problem on your hands. If, on the other hand, employees are encouraged to go home and have a life, you'll typically find high levels of productivity and creativity. Why? Because the richness of those lives collides with the discipline of work to generate new insights and ideas. Conversely, people who are overworked develop tunnel vision, and all they look for is an end.
Healthy companies pay well, but not too well. Most importantly, they eschew performance-related pay. This doesn't mean that they don't reward success; they do. But those rewards more often take the form of public accolades, extra vacation time, learning opportunities, or extra resources. All of these rewards fuel and enhance creativity so they keep everyone focused on the larger motivations that make companies successful. People stay and do good work because it matters.
Whenever I visit companies--which I do as often as I can--I look for these vital signs. When I don't find them, I worry, even if the company's doing well. The downside of not having these qualities isn't obvious at once or even quickly. But sooner or later the best people leave or burnout. The leaders don't get good advice--or, sometimes, any advice--and they easily mistake silence for harmony. Everyone's working hard but rarely well. And the best people are invariably interviewing elsewhere.
The balance sheet may look great but it's showing the past, not the future.
More from Inc.com: