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  1. A Tale of Two Companies and Their Banks

    "It was the best of times, it was the worst of times, it was... " Well, you can see the whole picture. In the last few months, I've worked on behalf of two companies as an outsourcing CFO. Both businesses require financial assistance from banks to ensure their operations and growth Both companies have been through difficult economic times. Both companies recognize that they must invest in procedures, processes, and staff to expand and earn the desired return for their shareholders. I would like to tell you how two firms have worked to organize bank loans, bringing on staff as well as investing in internal processes to build businesses that will deliver the desired shareholder profits. First, some background facts. Company A is around for just a little over 4 years. The company purchased its assets from an established business and over the course of the first three years, it expanded its operations to over 15% per year. In conjunction with a major acquisition Company, A is now almost double the size of the company it purchased. The margins have been excellent and the business has been in a position to pay money to its owner at the end of each year. As the company grew rapidly, the business, company was pushing its internal systems and staff to the limits. Furthermore, existing equipment and systems needed to be upgraded to accommodate future growth. In the middle of year 4, the clouds of storms began developing in company A. The company was required to recruit more employees to manage the exponential growth that it had witnessed and to accommodate constant growth in revenues. However, the rapid growth of the company meant that the system and staff were overloaded. This caused quality problems that caused a large number of customers to leave the company to join rivals. In addition two of the team members left the company and launched an alternative company. They also took on customers by offering lower costs on similar products. A rush to invest in capital equipment which was intended to cut the cost of labor was being used poorly and led to massive increases in the expense of supplies. Company A was losing money and was required to change its procedures quickly to correct the ship. Furthermore, the company's current credit card debt had to be refinanced to ease cash flow issues. Business B was operating for less than 5 years. It was a new company that its owner was able to bootstrap to reach recurring revenue levels which enabled the company to reach profit quickly. The flow of cash was the main focus and the business was capable of remitting cash back to the owner every year. The business was established with the owner in charge of the strategic direction of the company and overseeing every aspect of the company. As the company expanded, its operations were no longer effectively controlled by a single person. In year 5, CEO Company B's owner Company B realized that experienced employees were required to come in to manage the company. Prior growth was financed by customer advance payments, and the business was free of credit card debt. As the recurring revenue started to grow, it was the right time to invest in systems and people to help take the business to the next stage. Personnel recruitment would be closely controlled and synchronized with the incoming cash flow to ensure that the company could control the new expenses on a cash-positive basis. New opportunities for customers were increasing and were partially funded through bank loans and advances from customers. The company was beginning to demonstrate profitable operations and was required to invest the appropriate amount to help manage the growing demand. Both businesses needed help to navigate the tough times they faced. Which would do better with discussions with the bank in light of the circumstances? The outlook was grim for company A. Numerous mistakes resulted in the company losing customers and permitting some former members of the management team to establish a rival business. The staff was hired late to address quality concerns and the company now had too many employees to sustain the business as it was. Capital equipment investment that was intended to cut costs for labor has dramatically increased the cost of supply and was taking cash away from the business. The current terms of banks had placed this company into a situation in which the credit line continued to grow because of losses from operations. The company was required to consolidate existing bank contracts to avoid an eventual situation that could sever the company. To understand the way Company A managed through this difficult period, we need to examine the past to see how the company first began. At the time, the new owner recognized that there was a chance to expand the company quickly, based on the current economic context. This meant it was essential from the start to establish a solid management team led by an experienced CEO. The CEO was aware that it was essential to establish strong relationships with banks and establish procedures to manage the finances of the company. The new owner placed cash into the business to pay for a large portion of the acquisition. In addition, the CEO was able to negotiate the bank partnership. The bank offered term debt to fund the purchase as well as a credit line to help finance the working capital requirements. The new owner has provided sufficient cash to the company, the bank did not need personal guarantees in relation to loans. Additionally, financial covenants were set to reasonable levels. Company A was required to perform annual audits as part of the bank's financing, but this was something that the new CEO and owner viewed as essential for the company even though it wasn't required by banks. When the economic downturn hit, Company A had an excellent relationship with the bank and paid a significant amount of principal on existing term loans. The CEO regularly met with the bank in order to talk about how the business was experiencing and what the company did to resolve the problems, which included bringing in an experienced CFO advisory who could assist in addressing the tight liquidity issue. The CEO and CFO demonstrated to the bank that they had enough resources in the business to refinance its existing line of credit and debt in order to increase cash flow. The staffing levels were cut mostly through attrition, but by this method, the company was able to improve the overall quality of its workforce. The company worked with the company that made the equipment in order to address the issues that led to higher costs for supply and were able to address those problems over the course of a few months. Marketing Measurement