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Prakhar SharmaTop Contributor
Social media marketer, Content Writer
Asked a question 4 years ago

What are guardrails for the business?

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Prakhar SharmaTop Contributor
Social media marketer, Content Writer

Guardrails are boundary conditions that the owners want to put on the company’s actions based on their goals. They define what is in and out of bounds.

Guardrails can be financial or non-financial. On the financial side, they should align with the mix of growth, liquidity, and control that the owners want to prioritize:

  • Growth in value metrics (e.g., return on invested capital or total shareholder return) show owners how financial performance compares to peer companies and/or to other investment opportunities
  • Liquidity generation metrics (e.g., dividend payout ratio) inform owners if the enterprise is producing the expected amount of cash to meet the owners objectives outside of the business
  • Resilience of control metrics (e.g., debt-to- EBITDA) help owners understand and manage significant risks to the enterprise that could threaten their control of it.

In our experience, owners should hone in on a small number of financial metrics (usually four to six) that can define whether or not the company is successful based on what matters to them.  Doing so balances providing clear guidance to the company’s leadership with leaving them ample opportunity to figure out the best business strategy.