Tuesday, November 30, 2010

Financial vs. Operational Turnaround Issues

As a follow-up to last week's posting on restructuring and bankruptcy, I thought I'd talk a bit more about financial vs. operational difficulties. If your company is encountering financial difficulty or serious operational issues that could quickly lead to financial difficulty, pay attention. There's a crucial difference. An interim CFO may be able to help with a purely financial issue resolution, but a turnaround consultant will be crucial for an operational turnaround (although that consultant may ultimately step in as the CFO or COO or even CEO to take charge of the turnaround).

First, very few "financial difficulties" that companies encounter are solely finance-based. Financed based issues are those that are the result of taking on too much debt. That usually involves having EBITDA (earnings before interest, taxes, depreciation and amortization) that can handle the debt service at the time the loan is originated but, due to the general economic environment, loss of a customer, drop in average sales volume, etc., the EBITDA can no longer cover the debt payments. Or the finance-based issue could be due to taking on improperly structured debt - debt with a balloon payment, high interest rates, escalating interest rates or payments, etc. The terms may have seemed fine at the time but seem ominous 1, 2, or 3 years later.

Pure finance-based issues are fairly easy to fix (assuming you communicate frankly and regularly with the financing entity/debt provider). Simply sit down with the entity providing the loan and negotiate a restructuring. Request extended terms (an increase from 5 years to 7 years, for example), a lower interest rate for a specified period of time (from a few months to the remainder of the term), or removal of the balloon, to name a few of the options. As long as the underlying fundamentals of the business are the same, the debt provider will generally be amenable to restructuring the loan.

That last statement is key. If the underlying fundamentals have changed, those are operational issues. If you lost a major customer and that customer comprised 20% of sales and 25% of profit, that's NOT a financing issue. Obviously, you may not be able to make your loan payments but you should have seen the issue in advance. That 20% customer has been that way for how long? Two years? Four years? You should have set up a plan to remove or decrease the risk of the loss of that one customer. Are your receivables taking 60 - 90 days to be paid? Has this been ongoing for years? Usually, it's not a new development. That would be a finance issue. Usually, companies, especially rapidly growing companies, allow accounts receivables to hang out there for months at a time - for years. Then, when they stop growing so rapidly and the new business can't cover the old receivables or vice versa, they experience an almost immediate cash shortage.

Another operational issue - poor customer service and high customer turnover. When business is expanding and new customers are continually coming on board, a business can handle the drop off. But when business drops off, poor service reaps a high net cost on the bottom line.

These are just a few of the myriad operational issues that affect a business and results in financial issues in downturns. If any of this sounds like you, coulda, woulda, shoulda. The past is the past. You can't change it. Don't keep beating yourself up. Just ask for help from those that can provide it. Your CFO or an interim CFO, your CPA firm, your board, your banker, a turnaround consultant. Act soon so you can take effective action and successfully turn around your business before it's too late.
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Thursday, November 25, 2010

Happy Thanksgiving!

Due to the Thanksgiving holiday, we are taking the remainder of the week off. Look for the next post on Monday, November 29. I hope you enjoy the holiday with your friends and family. Don't eat too much! Happy Thanksgiving!
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Tuesday, November 23, 2010

When Companies Are In Trouble

Last Thursday I attended an excellent breakfast meeting/presentation sponsored by my alma mater and two other schools (The Wharton Kellogg London Business School Breakfast Series, in case you are in Atlanta and wish to attend. The next one's in January.) The subject was turnarounds and corporate restructuring and the two panelists were a turnaround consultant and bankruptcy restructuring attorney, respectively. I have several friends and acquaintances in this industry so some of the information wasn't new to me but I received a lot more detail than I had previously known.

For example, the OVERWHELMING majority of company owners practice denial and wait until the nth hour to request assistance. By then, it is nearly always too late and the company either ends up shutting down and selling off its assets or liquidating through a Chapter 7 bankruptcy. The latter occurs if the level and complexity of creditors mandate this. A lot of companies enter Chapter 11 - reorganization - as a means to save themselves but the vast majority of companies NEVER emerge from Chapter 11. The bankruptcy judge either converts to Chapter 7 or appoints a trustee who essentially serves as a liquidation advisor.

Why do so many owners stick their heads in the sand in the face of financial trouble? The company is their baby. They've had it, built it over 10, 20, 30+ years and now they must say that their baby is not just ugly, but really ugly. Many just can't do it.

The CFO (or VP of Finance) is usually the first one to see the signs of trouble. They do forecasting and monitor cash flow. They can identify trending and see that cash is going quicker than usual, that accounts receivables are taking longer to get paid, that one customer comprises the majority of the over 45 days receivables. This financial information provides the crucial first piece in awareness of issues that could seriously adversely impact the company in 6 - 9 months. The first step at the time the CFO spots a downward trend and notifies the owner is to act. Do something.

Do what, you ask? Talk to the customer who is delinquent. Are they in trouble? Can't tell over the phone? Visit the customer's office or talk to their other suppliers. Look at your customer base. Do you have too much of your business tied to one customer? Find other customers to offset that risk as quickly as possible or reduce your overhead to cover the loss of the customer, just in case. (Or develop a plan to quickly reduce overhead in case of the customer loss.)

Do you have an advisory board or Board of Directors? If so, share the financial information with them and get their input. Let your creditors know what's happening. Be frank and work with them to develop a plan. The worst thing for them is to be blind-sided. They are much more flexible and willing to work with a struggling company when they have more information sooner. More data earlier affords them a number of options which disappears as the situation worsens.

Finally, if your company is already on its last legs, DON'T try to restructure by filing Chapter 11. A fully knowledgeable bankruptcy attorney will turn you down. However, there are less knowledgeable and more unscrupulous attorneys out there who will take your business. Chapter 11 can be VERY expensive. If your business won't survive, it would be best to pursue other options for wrapping up the business that are easier on you and more fair to your creditors. Remember, all the money that goes to pay attorneys and bankruptcy court direct and indirect fees is money that could have gone to creditors.

If you are not sure what to do, seek out a turnaround consultant. Not sure where to find one? Ask your banker. He/she will likely give you three references.
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Wednesday, November 17, 2010

Adding Machine (Simple) Cash Flow

In the CFO world, I don't think we've hit the generation who doesn't remember financial life before the desktop or laptop computer. (If we have, keep that to yourselves cause I don't want to know about it yet!)

But there was indeed financial life before computers. Remember the adding machine? My grandfather had an adding machine and every month I could hear his fingers flying up and down those numbers. He would crank the handle & mumble a few words I wasn't supposed to know yet. Every few hours he would holler for his business partner.

"Did you know Ma Bell wants $5.75 for our phone this month?!" What's she going to do? Re-invent the way we use it?" (Little did he know! Again, this was before the AT&T breakup and subsequent, 2 decades later, re-combination.)

"Edddd! Ed! (Names have been changed to protect the innocent.) Where is the invoice for the Johnson account?! We can't make money if we don't invoice these people!"

"Edddd! Ed! We've got to talk about CASH FLOW, Ed!"

And my ears perked up. At only 11, I had an idea about cash flow, but I didn't really KNOW cash flow.

And so it was between Ed & my grandfather that I learned my first financial lessons. (I learned what those mumbled words were too, but I won't share those!)

The basic concept of Cash Flow Management hasn't really changed since I was a kid. After all, it really is simply analyzing and ensuring that your cash inflows surpass your cash outflows at any given time. Doesn't matter if you're using an adding machine or fancy software.

Now, when we get into tracking, analyzing and adjusting cash flow, things get a little trickier, but let me share some insight with you. But remember, cash flow is NOT income. You can have high income but negative cash flow.

First, analyze your cash flows. Then devise & implement cash management strategies.

To illustrate this and make it more simple, let me provide you with an example:

  • Let's assume you enter into a $200,000 contract to provide marketing services over a period of 6 months.
  • Your revenue the previous year was $1,000,000 so that contract provides 20% of the previous year's revenue.
  • According to the contract, you submit invoices once per month, on the 30th. Then the customer has 30 days to pay you.
  • Your firm starts fulfilling the contract on February 1st.

Fortunately, with a non-retail or wholesale service business (except for construction and other materials-heavy business lines) there is typically minimal cost incurred before the contract commences.

(Tune in Friday for the rest on cash management for small businesses.)

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Monday, November 15, 2010

Angel Financing

For those of you who seek angel financing, here is additional information to guide you in your pursuit. It's not a how-to this time. It's more of an explanation.

Angel financing is NOT your friends and family. Friends and family are who you approach BEFORE you pursue angel financing. However, angel investors can come from or through your attorney, banker, CPA, fellow business group member or other business associates you know.

Your friends and family aren't as concerned about how your Buy-Sell Agreement is structured or about dilution of their shares. They typically want to help you and benefit in the process. You go to them sometimes before you even have your product or service market ready. They invest in YOU moreso than the company.

When you hear people speak of "Series A" or "Series C", it refers to the stage of financing. Angels do care about dilution. They are investing in YOU and the product or service. (Note that the management team is the MOST important concern. A great management team can build a good company with a so/so idea or product but a mediocre team with a great idea or product will usually crash and burn.) An angel investor is taking a risk and want to make sure his/her level of return is commensurate with that risk. So a "Series A" is the first round of angel financing (i.e., not your funds or your family or friends' funds). "Series B" will be the 2nd round of angel financing. By this time, you may have engaged venture capitalists. "Series C" is the 3rd round of financing, and this round is often venture capital or private equity, depending on the industry.

As each new round occurs, the equity is diluted. You may or may not have new investors in each round. Many angel investors, especially those with more sizable assets such as a fund or a group or a very wealthy individual, will inject additional funds into a venture that they like when they believe it is doing as well or better than they expected.

Keep in mind that if you need to raise hundreds of thousands of dollars and opt to pursue angel investors, you will need to give them a 30-50% return, depending on the stage of your company when you engage them. So you must intend to scale to a multi-million dollar company fairly rapidly. If you intend to raise millions, you obviously envision your company being worth $100 million or more sometime within the next 7-15 years. That's the only way you could give the angels the returns they seek.

But don't despair if you aren't in either category. If you only need to raise $100,000, then you can provide an expected return with revenues in the $500,000 - $1 million range in the next few years, assuming 20% or higher net profit margins.
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Thursday, November 11, 2010

NASA Small Business Symposium and Awards Ceremony

The 3rd Annual NASA Small Business Symposium and Awards Ceremony is coming up! This event is FREE!

Attendees will learn about the skills, resources, and technologies needed to achieve NASA's missions, programs, and research. Participants also have an opportunity to hear from the U.S. Small Business Administration and other federal agencies, as well as prime contractor representatives.

This two-day event will culminate with the NASA Small Business Awards Ceremony, on Wednesday, December 1, 2010. The NASA Small Business Awards Ceremony will recognize outstanding contributions made by NASA employees as well as industry representatives in support of the agency's small business program.

Small Business Advocates Awards (SBAA) will be made in four categories:

1. Small Business Specialist of the Year
2. Procurement Person (or Team) of the Year
3. Technical Person (or Team) of the Year
4. Program Person (or Team) of the Year

Small Business Industry Awards (SBIA) will be made in three categories:

1. Small Business Prime Contractor of the Year
2. Small Business Subcontractor of the Year
3. Large Business Prime Contractor of the Year

Information:
Dates: Tuesday, November 30 - Wednesday, December 1, 2010
Where: Marriott Bethesda North Hotel and Conference Center
5701 Marinelli Road
Bethesda, Maryland 20852.

Click here to register . There is NO onsite registration so please register in advance.
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Tuesday, November 2, 2010

Angel Investors

Are you a technology, biotech, medical product or other potentially high-growth company trying to access angel investors? Check out some of the following resources across the US:

  • TiE - The Indus Entrepreneurs. This group is not specific to one city but is present in nearly all major metropolitan cities in the US and many not so major ones in California. This is a group, open to everyone, that focuses on entrepreneurship - especially technology-related entrepreneurship. It was founded by a group originally hailing from the Indus region of India. The majority of its membership is comprised of individuals with direct links to this Indian region . (Put another way, the majority of members are of Indian descent.) It's a great group with knowledgeable speakers. They have a mentor program for any member who wants to participate. Some of the speakers are angel investors and some of the members are either angel investors or well connected to angel investors.
  • Business incubators. A growing number of cities across the US have business incubators. Some have been around for years, such as ATDC (Atlanta Technology Development Corp.) or Battery Ventures, has been around for nearly two decades. Others are newer. Check with local universities or business associations in your city to determine if one exists in your area. Incubators can connect you to angel investors and provide you with support, space, and equipment at a fraction of the cost that you'd pay on the open market.
  • Angel investment groups and associations. Go online and search for these in your area. Find out if any of them host conferences or periodic presentation forums where start-up firms that meet their criteria have the opportunity to present. Even if no one in attendance is interested in investing, attendees often forward information on to their peers who may be more suitably matched.

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