Tag Archives | cash flow

Spot a Zombie Company

Last week, I talked with several lenders, investors, and entrepreneurs. One of the topics that kept coming up was their client’s problems wasn’t cash – even though their clients tried to convince them of it. While cash was an issue that needed to be addressed, the problem instead lies in the leadership. A few weeks ago, we discussed how zombie employees are destroying your company. But those zombie employees have developed a zombie culture! Here’s how to spot a zombie company and identify if you are one of them.

spot a zombie companyHow to Spot a Zombie Company

In any type of therapy group, the first step to recovery is admitting that you have a problem. Identification is crucial if you want to change. Therefore, we are walking through how to spot a zombie company. As it is so prevalent in our business society, it’s becoming more and more difficult to disguise.

Stay ahead of the curve and download our 3 Most Powerful Tools for free! Don’t sit back and watch your company spiral into a zombie company

#1 Status… And You Know It

Have you ever seen a company that boast it’s #1 and everyone around knows it? These companies get to the top, become prideful, and then eventually, they are overrun by zombie employees. If every single person in your company says the exact same thing, then you’re in big trouble. In order to be successful, you need people to go against the grain. That’s how innovation happens.

Enron, for example, was Fortune Magazine’s “America’s Most Innovative Company.” But nearing the collapse of their empire, innovation came to a halt as the executives became more greedy and created a culture of secrecy. They knew they were #1. So, the executives challenged anyone trying to innovate or make changes to the company. Both employers and employees lost sight of the mission and vision of their company. As a result, both parties caused (or would have caused) the death of the company.

“Do you know what it takes to make an ethical decision in the face of a group of people who are willing to go the other direction? It’s one of the most single vulnerable acts of our lives.” – Brené Brown

spot a zombie company

Happy Go Lucky

Happy go lucky is a term that means that people are cheerfully willing to have no concern for the future. Many can easily identify the difference between authentic happiness and fabricated happiness. The later wreaks of inauthenticity and feels gross. When a company culture is always happy, it may be an indicator that it’s a zombie company. In this case, you may find that both employees and employers are:

  • Ignorant of anything bad going on
  • Blindly doing their jobs
  • Hiding something from others
  • Shutting down any negative statement or critique
  • Saying positive things all the time

There’s a huge difference between a company that everyone loves working for and a company where everyone is happy. You cannot expect your employees to be happy every single day. Life happens. So if it seems like life isn’t happening at a company, then it could mean bad news.

They Don’t Change

Zombie companies simply don’t change or allow for change to happen. Because they are so laser-focused on their vision and mission, they neglect the changing world around them. Technology is changed every single day. What worked a month ago may not work today. Remember Borders? It was a popular bookstore. But while Barnes & Noble and Amazon were taking advantage of new technology (Nook, Kindle, etc.) and building an e-commerce platform, Borders did not at first. By the time they did start to change, it was already too late. While there were many other financial issues that needed to be addressed in Borders for it to survive, the key is that zombie companies don’t want to change.

Look around in your community. It’s relatively easy to spot a zombie company as the demand for change is becoming increasingly prevalent. Many leaders get overwhelmed by change, so they simply stop changing. But they are also killing their company. As the financial leader of your company, you must be willing to allow change and create change in your company.

spot a zombie company

They Know Everything

Zombie companies are comprised of “know-it-alls.” Whether it be the employers or the employees, they think they have everything under control, know everything, and don’t want to learn. What do your customers want? If the response is “we know everything already”, start running. Truth is… You don’t know your customers. They are changing every single day. Like I said before, technology is changing constantly. As a result, your customers are too. Businesses aren’t in business without your customers. So you need to be talking with your customers daily.

A couple years ago, news spread eventually but it took time to spread. Now, news spreads like wildfire and at times, it can be very overwhelming. Platforms like Facebook, Twitter, online news sources (NY Times, Wall Street Journal, etc.) force feed you content every second of the day. While you may know a lot of things, you don’t know everything. But zombie company’s think they know everything. And that’s a problem.

Challenge each of your team members to question everything you do and why you do it. Call up your customers. Learn how to improve productivity or improve cash flow. Innovate you finance, operations, and sales departments.

Is Your Company a Zombie Company?

The biggest question of the hour… Is your company a zombie company? Have we described you in the above paragraphs? We have good news… You have identified that you have a problem. And there’s a solution to reverse the effects of being overwhelmed by zombies.

Be a Financial Leader

The best way is to be an effective financial leader. At The Strategic CFO, we pride ourselves in developing financial leadership in our clients as we consult with them and coach them. Like we said before, some companies think they have a cash problem or inventory problem or economic problem… But in reality, it starts with the leadership. A fish rots from the head down, so therefore, you as the financial leader need to be a more effective leader, improve profitability, and improve cash flow.

Improve Profitability

You have set your prices, have your costs, and out comes profit. But to not slip back into old habits, you need to think of profitability improvement strategies. Click here to access one of our 3 Best Tools includes our Pricing for Profit Inspection Guide. Improve profitability by shaping your prices (and economics) to result in profits.

Improve Cash Flow

We say it frequently because it’s true… Cash is king. As a leader, you need to have your finger on cash at all times. The worst thing (and unfortunately, a common issue) is that the executive team expects cash to be there because they made their sales mark. But if someone is not watching it, it could end badly. Click here to download our 25 Ways to Improve Cash Flow whitepaper, along with our other 2 most powerful tools, to learn about cash flow improvement strategies.

Be a More Effective Leader

Zombie companies lack effective leadership. You can create success through financial leadership. That’s what we as a company lives and breathes everyday. Be a more effective leader and access our 3 best tools to start growing your company.

spot a zombie company

Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

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How Growth Affects Cash Flow

Growth is great! Whether it is expanding into your third country or tapping into a new market, it’s an exhilarating process (especially for the entrepreneur). But it can also result in a crisis… You can’t fulfill orders; processes are being thrown out the door to just get it done; inventory isn’t leaving the warehouse. Growth can result in a disaster. When a company is growing at any speed, there are often growing pains that come with it. Over the past 20+ years, The Strategic CFO has witnessed and been a part of some incredible turnarounds that started from a few simple steps of improvement. The #1 growing pain stems from cash. Or, actually the lack of it.  We often forget how growth affects cash flow, but it has huge repercussions if you are not watching it carefully.

Growth Affects Cash Flow

What Happens When a Company Grows

When a company grows, the first visible thing that happens is cash gets tight. It’s very common for your marketing and sales team to see grow as only a good thing; nothing bad could be caused from growth. But when more sales come in, more employees are needed, more offices are required, more inventory is purchased, money can very quickly fly out the door. We say it frequently because it’s true: cash is king.

As you gear up for growth or are in the early stages of growth, also iron out some of the issues that may grow into problems as the company grows. For obvious reasons, start addressing any issues that impact the cash flow of the company. Then address other issues including management, accounting, product development, and labor.

Another thing that normally happens is that we are so excited about growth, and maybe cash is controlled, but we forget about controls, specifically internal controls.  Money is flowing and product is flying off the shelf, but no one is watching what may be lose ends.  Such as in a manufacturing scenario, material is being ordered as fast as you can get it and raw materials are being converted to finished goods. But maybe waste is also going through the roof because no one is watching that.  Or maybe tools are mysteriously disappearing from the shop, or maybe your margins are actually suffering because your indirect costs have grown more than anticipated.  The lack of having process and controls in place can lead to the mentioned issues, thus also leading to squeezing cash.  Because ultimately, it all results in cash or consumption of cash.

Growth Affects Cash Flow

Growing Too Quickly?

If you are in a company that is growing too quickly, it may be time to get some capital. There are several types of capital that you can acquire to fund your rapid growth. Ultimately, there are three ways to get capital.

  1. Debt
  2. Equity
  3. Or a mixture/combination of debt or equity, or debt that can convert to equity

Giving up equity is the most costly way to raise capital because as your grow you have given up some of the upside. The sources of either debt or equity include and are not limited to the following:

At The Strategic CFO we can help you analyze the different cost of this capital and the most efficient structure for your business.

Start-ups, development of new products, etc. often require a good amount of working capital to support the rapid growth for those products or services to have a steady foothold in the marketplace. Consequently, they require a significant amount of cash and leadership for it to be catapulted into success. If this is you, start the cash flow improvement strategies early. Make it part of your culture and processes. The key is to manage your cash effectively so that each dollar can be stretched to the max. Download our free 25 Ways to Improve Cash Flow guide to start implementing tested and successful cash flow improvement strategies into your company.

Growth Affects Cash Flow by Absorbing Cash

If you haven’t figured out by now, growth has a way of absorbing cash. When a company wants to increase sales, it requires fuel – cash. As the financial leader of your company, shift your focus on improving profitability and providing fuel for your sales team to grow the company. While your CEO needs to grow the company, he or she needs a wingman to lean on. You are that wingman. Instead of acting as a CFnO (say it like CF No), provide a path for your CEO to grow the company. Guide them in your new cash flow improvement strategies.

Don’t know where to start in improving your cash flow? Click here to download our 25 Ways to Improve Cash flow and get an invitation to our SCFO Lab – the premier financial leadership coaching platform.

Growth Affects Cash Flow

Cash Conversion Cycle (CCC)

As you continue to look how growth affects cash flow, start by analyzing your cash conversion cycle. Simply, it is the amount of time that you are able to convert processes, resources, etc. back into cash. There are some simple steps to reduce your Cash Conversion Cycle (CCC) or operating cycle, but let’s see what it is and how you can use that to improve your cash flow.

What is the Cash Conversion Cycle?

The Cash Conversion Cycle (CCC) calculates the amount of time it takes to convert resources into cash flow. To calculate your CCC, use the following equation:

CCC = DIO + DSO – DPO

DIO stands for Days Inventory Outstanding. DSO stands for Days Sales Outstanding. And finally, DPO stands for Days Payable Outstanding. By using the CCC, you will be able to identify areas of improvement.

For example, if you are collecting receivables every 45 days, you may have an opportunity to reduce that to 30 days. By collecting receivables 15 days earlier, you will not be in as large of a cash crunch because that cash is in the bank 30 days after the service is rendered versus 45 days. To calculate DSO, use the following formula:

DSO = 365 * (Average Accounts Receivable / Total Credit Sales

How to Improve Your Cash Flow

There are several ways to improve your cash flow using the Cash Conversion Cycle. Some of these include improving collections (A/R), invoicing quicker, obtaining deposits faster, extending vendors so that you can pay later, and reduce the amount of inventory stored. For example, a few of our clients are in the oil & gas industry. When the oil & gas industry takes a downward turn, we are impacted because they cannot pay us as quickly, but they need us more than ever. One of the tactics we put into practice to improve our cash flow was to invoice within 24 hours. Our clients were being trained to respond to us quicker and pay our invoices. Therefore, we were then able to do more to help them.

There are so many other ways to improve your cash flow, especially in times of growth when cash is tightest. If you are seeking more ways to make a big impact in your company, download the free 25 Ways To Improve Cash Flow whitepaper to find other ways to improve your cash flow within 24 hours.

Growth Affects Cash Flow

Strategic CFO Lab Member Extra

Access your Cash Flow Tuneup Execution Plan in SCFO Lab. This tool enables you to quantify the cash unlocked in your company.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

Growth Affects Cash Flow

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5 Cs of Credit – How to Be More Credit Worthy

Are you credit worthy? Right now, is your credit good enough for a lender to give you a loan or line of credit today? If your answer is no or if your not sure of your answer, take a look at the 5 Cs of Credit. This 5-point checklist allows loan officers to easily determine if you are going to be good for their banking business. Although, banks don’t strictly rely on only the 5 Cs of Credit, it’s good to know where they start.

But first, what are the 5 Cs of Credit?

5 Cs of Credit

The 5 Cs of Credit include cash flow, collateral, capital, character, and conditions.

5 cs of creditCash Flow

The bank need to know that your company can generate (and has generated) enough cash flow to pay off the debt. To increase your chances of getting approved for a loan, display how you have paid off debt before, had consistent cash flow, and plan to pay off debt in the future. Remember, cash is king. Because of that, this is one of the most important Cs.

If you need to improve your cash flow, download our free 25 Ways to Improve Cash flow whitepaper. Get approved for that loan!

Collateral

Unfortunately, some companies fail. Regardless of whether the company fails or not, the bank wants to make sure that it can be paid. The bank looks for sufficient collateral to cover the amount of the loan as the secondary source of repayment. This C allows the bank to cover all their bases because at the end of the day, they just want to be paid.

The bank wants to make sure it is protected if you cannot repay the loan. As a result, the bank will look into your savings, investments, and/or property.

5 cs of credit

Capital

Capital is a huge sign of commitment. One of the reasons why the bank looks at capital to approve a loan is to confirm that the company can weather any storm and ensure that the owner will not just walk out any day. The bank needs to know that there is a significant commitment, that being an investment, from the owners of the company.

Character

One of the suggestions we give to clients when developing a banking relationship is to take their banker out to lunch. This provides an opportunity for the banker to assess your character. What are they looking for? Integrity, honesty, respect, and other virtues reflect a good business person who will stick with their commitments in the good times and the bad. Sound character is critical in business. The banks want to feel safe when doing business with you.

Indicators of character include credit history and stability. The biggest question asked is, “will you be able to repay the debt?”

Conditions

With any business, there are external factors that could impact the company’s success. Therefore, the bank looks for conditions surrounding your business that may or may not pose a significant risk to your ability to succeed (and pay off your loan). If there is high risk, the banks will be more cautious when approaching you. But if the risks are small and do not impact any of the 5 Cs of Credit, then the bank is more willing to offer a loan.

Ask yourself: can you repay the debt?

Why do banks follow the 5 Cs of Credit?

In short, banks follow the 5 Cs of Credit to mitigate any risk related to loaning to a company. The risk a bank incurs from lending money to companies can be managed by assessing different areas of credit. Although not every bank uses this list, it’s safe to assume that when approaching a bank, you need to address each of these factors.

Relationships

Business deals with people; therefore, it is critical for the management (especially the owner/CEO/CFO) to have a good relationship with their banker. Imagine a random person coming into your office to ask for a $350,000 loan. Because you have no relationship with them, you don’t know how honest they are, if they have integrity, how willing they are to pay back the loan, how they do business, etc. Because there are a lot of unknowns, the risk increases dramatically.

Trust between a bank and a company is developed when you have proven that you are able to pay off your loans, have long-lasting relationships with customers, vendors, suppliers, etc., and alert the bank if your projections are a little off.

5 cs of creditWhat Lenders Look For

Lenders look to reduce their risk. They are willing to provide loans that may not have the highest return over risky loans with high returns. Areas of risk include the amount of credit used, the number of recent applications for loans, how much the company makes, and available collateral.

To start the process of applying for a loan, address areas that need to be fixed before the application, explain any red flags that your banker might raise, and prove you are credit worthy.

How to be More Credit Worthy

Creditworthiness is a valuation method banks use to measure their customers, your company. Although there may be slight differences between personal and business credit scores, it is a good start to improve your personal credit score. If you follow the same guidelines in your business, the company’s creditworthiness will increase.

Be more credit worthy by:

  • Paying bills on time
  • Pay more than just the minimum amount required
  • Manage credit card balances
  • Limit or manage the usage of debt

In addition to addressing the factors that directly impact your credit score, take a look at the 5 Cs of Credit. If you find yourself lacking in any one of those areas, make it a goal to increase your creditworthiness in that area over the next quarter. If you have decided to start tackling the first “C” – cash flow – download the free 25 Ways to Improve Cash Flow whitepaper. Make a big impact today with this checklist.

5 cs of credit

Strategic CFO Lab Member Extra

Access your Cash Flow Tuneup Execution Plan in SCFO Lab. This tool enables you to quantify the cash unlocked in your company.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

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Selling Your Business

Companies are constantly being bought and sold; so regardless of what position you are in or what industry you service, selling your business is one of those topics you need to know about.

It’s a common misconception that the financial persons are overhead, are not valuable, and simply just count the numbers. But over the past 25 years, we have been converting those battling that stereotype into financial leaders. In the case of selling your business, a financial leader will do more than just put a nice price tag on the company, but transform it into a more profitable, more attractive company.

But why would someone want to sell their perfectly good company in the first place?

selling your business

Why would you want to sell your company?

For an entrepreneur, selling your business is either one of two things: an unwanted but necessary action OR an opportunity to move onto the next venture. There are several events that could cause someone to sell their company. Those might include retirement, relationship issues, an illness or death, or the inability to perform financially (resulting in bankruptcy). Conversely, those in the business to sell might be bored, wanting more innovation and excitement.

Any of these reasons are not wrong; however, it should be important to you to want to get the most value of of your company in the case of a acquisition or merger.

Wanting to sell your company? You need to access our free Top 10 Destroyers of Value whitepaper to make sure you don’t have any destroyers in your business impacting the value of your company! Click here to download.

How would sell your company?

There are a couple different ways that one could go about selling their company. The US Small Business Administration (SBA) argues that “If you have decided to get out of business and are not able to pass your business on, merge it with another business, or sell it as a going concern, liquidating the assets could be the most appropriate exit strategy.”

Liquidation is often used when your company is insolvent or unable to perform financially. This practice is often used to pay off any debt the company might have. Whenever a company is facing bankruptcy, debt restructuring is a vital part of the process to protect the debtors.

You could also sell off parts of the company, such as a practice, a product/service, talent. The reason why most companies would do this is because they have a product or service that doesn’t quite fit into their company. It’s the black sheep of the family! To create more of a synergistic entity, owners sell a part of the company or buy a part of another company. The goal of mergers and acquisitions to to bring more focus to the most profitable side of your business.

Or you could sell the entire company… Now there are two ways to sell the entire company: sell the assets (see above) or sell the stock. The later is more beneficial for the seller than the buyer. An article in the Wall Street Journal compared asset sales to stock sales and concluded that “Stock purchasers… are buying the company itself and thus are exposed to all of its potential problems.”

Valuing Your Business

Regardless of whether you are selling your business right now or not, it’s important to value your business. This just-in-case action will a) speed up the process if a buyer does come around, b) immediately add value to your company by addressing needs, and c) start the brainstorming session to improve your business. Valuing your business now will mean for a better future.

selling your business

Beware of Those Destroyers

As you are valuing your business, find those “destroyers” that greatly impact the value of your company and take steps to address them immediately. What is a destroyer? We have partnered with Professor of Entrepreneurship at Rice University Al Danto to identify what areas in a business that destroy the value of your company. (You can access his free whitepaper here.)

The two most common destroyers that we see with our clients starts with the leader and the consistency of revenue.

Start with yourself… Are you destroying your company? Something at The Strategic CFO that we’ve always said is that the fish rots from the head down. If the leader of the company is not leading well, manipulating the team, abusing its employees, not managing well, or getting involved in illegal practices, then the business will loose major value. Suppose you are in a situation where you feel you are destroying your company, where do you start? First, do a self assessment on yourself. Then, interview your team on what you can do to change. Finally, put everything you learned into practice. Continue to do these three steps until you see major change in the success of the company.

As a financial leader, it is also your responsibility to communicate the consistency (or inconsistency) of your company’s revenue stream(s). Honesty is key in the financial world. Are you consistent or inconsistent? If the company has inconsistent revenue streams, present solutions to your management team to develop consistency. Buyers are willing to take risks, but they will choose a company that has more consistent revenue than a company that does not.

If you want to learn about the top destroyers of value, click here to download the free Top 10 Destroyers of Value whitepaper.

Prepping Your Company for Sale

The best prep you can do when preparing your company for sale is to actually prepare. What does this mean exactly? Clean up the books. Tidy up any loose ends. Address any issues you feel a buyer would be turned off from. Reflect on past performance, then focus the company to be more attractive to any buyer.

In addition, start the process of valuing your business, improving cash flow, and maximizing profitability.

Value Your Business

There are different methods to value your business, but the most commonly used method is EBITDA valuation. Reach your industry to figure out the most commonly multiple of EBITDA used in mergers and acquisitions. Once, you pinpoint that multiple, plug it into the following formula: Enterprise Value = Multiple * EBITDA

What is your business worth?

Improve Cash Flow

Cash is king. You have probably heard that a million times throughout business school and in your career. That statement cannot be emphasized or repeated enough because without cash flow, there is no business. Prepping your company for sale includes unlocking cash in your business.

Maximize Profitability

How profitable is your company right now? Focus on maximizing the profitability of your company. If the focus of your entire team is to maximize profits and cash flow, great things will follow. If you’re in position to sell or just want to prepare for a potential sale, download the free Top 10 Destroyers of Value whitepaper to learn how to maximize your value.

selling your business

Strategic CFO Lab Member Extra

Access your Exit Strategy Checklist Execution Plan in SCFO Lab. The step-by-step plan to get the most value out of your company when you sell.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

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1

Key Elements When Seeking Financing

key elements when seeking financing

This past week, one of my clients met with a banker to develop a new banking relationship. He hands the banker the company’s financial statements, expecting the banker to look at the income statement. Instead, the banker flips to the back of the financial statements to look over the balance sheet. As the coach, I asked my client, “See what he just did?” Most financial leaders (and the owners of their businesses) are consumed with their income statement but the banks want to know are more interested in how leveraged their banking client is. Not surprisingly, there are a few key elements when seeking financing for companies to follow.

Key Elements When Seeking Financing

Every company cycles through good and bad times. Depending on what part of the cycle your company is currently in, your banking relationship may be influenced. There are some key elements when seeking financing that will keep you on the good side of your banker.
Identifying your KPIs is a critical piece of the process when seeking financing. Want to find your KPIs and learn how to track them? Access your free KPI Discovery Cheatsheet today!

Leverage

What is leverage? Financial leverage is the use of borrowing from the bank to offset the cost of sales. Many companies hope to borrow just enough to increase their capabilities to sell more. But if banks see that you are too highly-leveraged, it’s bad news!

As a key element when seeking financing, leverage is important to have as it provides credibility to your borrowing experience. A banker will see that you have maximized the potential of previous capital to increase sales. The “kicker” here is if you have failed to optimize the borrowed capital potential, then the bank is going to be more prone to backing out of (or not starting in the first place) a banking relationship with you.

Cash Flow

We say it often and we say it loud… Cash is king. Without cash and/or liquid assets in your company, the bank is going to turn its nose up at you. Be sure to communicate the availability of cash in your company. For example, if a friend asked you for $250,000 but had no way of paying you back, you would be wary and decline the ask. This is because there is no hope that you will get the money back that you loaned. The bank acts in its best interest.

Make it easy for the bank to make a decision. Communicate through the financial statements (especially the balance sheet) the availability of cash.

Not About Price

Oftentimes, business leaders think that the bank cares about the price of your product. They don’t. To the bank, price is the least important factor in their assessment of your company because money is a commodity to them. Price is immaterial.

When meeting with a banker, communicate the bottom line and what’s on the financial statements NOT how you price your product. The bank is not your business consultant. They have to make money off of you.

Creating a Banking Relationship

When seeking financing, it is essential to create a banking relationship. You wouldn’t get married to the person you passed by on the sidewalk, so why would you get into a banking relationship with someone you have zero connection with. There are a few things that you need to look for to have a successful banking relationship.

What to Look For

If you are just starting out in a new city or have no relationships with any bankers, one of the first things that you can do is connect with people that do! For example, as a consultant, I have multiple relationships with various banks. When one of my clients needs a banker, I make the connection. People love feeling like they have it all, so give them the benefit and ask for help.
key elements when seeking financingLook at the bank for their philosophy and how they take care for their customers. In addition to philosophy, look at their morals.
Some questions to ask your banker in the “dating” stage include:
  • How long is a typical relationship with your customers?
  • What are the communication boundaries?
  • What is the bank’s view of breaking debt covenants?

Relationship or Transaction

Another important question you need to ask yourself is: “is this bank looking for a relationship or a transaction?” If you answer the latter, then you are just commission to them. When times are rough, you’re going to get cut. But if the answer is a relationship, then you’re looking at a long healthy marriage.

Relationships are absolutely critical in business. Value these relationships and take care of people. It will reflect in your business.

How does the bank deal in times of crisis?

A few years ago, I had a client that went through a period of stress. In the last quarter of their fiscal year, the business was growing and was doing well. They had 4 quarters of decline, but had tracked their KPIs. Although they had broken a few debt covenants, they were tracking their progress carefully with the bank. This client had a strong relationship with their bank. Without that relationship, the bank would have taken my client to the “workout” group.
Don’t have KPIs to help your banking relationship? Learn how to identify your KPIs and how to track them with our free KPI Discovery Cheatsheet. Click here to download your cheatsheet!
When you stub your toe, how does your bank react? Are they willing to let you slide on debt covenants for a few quarters as long as you have a plan to get out of the downturn? Often, people don’t see the importance of knowing how your bank is going to react in times of crisis. The economy continually ebbs and flows, changing for good or for bad.
Also, how does the bank deal with growth? You need more financing, but you are breaking covenants. Are they willing to provide financing with the knowledge that things won’t pick up immediately?

 The Workout Group

Several years ago, the bank wanted to meet with another of my clients because they had broken their debt covenants. The client calls me after meeting with “great news”! He said that the Bank had offered to work out his problems in the workout group. This “workout” group isn’t to work out your problems and put you back on track. It’s to work you out of the bank. This is not a good thing.
You don’t think your house will ever burn down, but what happens if your house does burn down? You don’t think you need a bank to weather the storm, but what happens when you need the bank to weather the storm with you? Assess whether or not your current banking relationship will be your insurance in the case of a fire or storm.
One way to do this is to look at the bank’s philosophy of business and their internal culture. How tight are they with the rules? Are they willing to stretch a little on their debt covenants and step up to help in times of distress? My client’s bank was unwilling to stretch its debt covenants. Instead the bank just wanted to wipe their hands clean of my client and move on to the next sale.
This willingness to be flexible all boils down to relationships. I have to warn you though, not every bank is similar in their goals.

key elements when seeking financingGet in Line

To prevent being put into the “workout” group, it’s crucial to start out on the same page. Get an alignment of interests, philosophies, culture, and anything else that would impact your company.

Interest and Philosophies

If the bank is only interested in their bottom line, then it may not be a good fit. If the bank is truly invested in your company and is willing to help you out in any reasonable way, then it’s a perfect match.

As I’ve built The Strategic CFO, it’s been a priority of mine to create relationships with bankers as they are going to reap the benefits of my clients doing business with them and I value their expertise. As a result of our mutual interests, the bankers in my network continually push potential clients towards my consulting practice. Those bankers and I have a strong relationship where we understand each others’ needs and desires as well as feed each other.
Of course though, I have had bankers tried to take advantage of my generosity and not return the favor. As a result, those relationships did not last long. It’s all about getting ones’ interests and philosophies in line.

KPIs That Influence Debt Covenants

Banks monitor your debt covenants. To help them (and you) out, identify KPIs that influence debt covenants to help track where you are and where you’re going. Picture this, your significant other or spouse comes home and lets you know that they’ve purchased a house, car, and boat without ever discussing it with you before. If you’re like me, I’d be surprised and would want to control the situation. If your significant other continues to make extravagant purchases or decisions without your prior knowledge, you would have trust issues and may want to cut up their credit card while they’re sleeping.
People see banking relationships as far-off and a different type of relationship. But the truth is, it’s all the same. Relationships are relationships. If you or your company or your significant other continues to create negative surprises, it’s not going to help with the relationship.
First, fix the problem before it becomes an issue. As soon as you see a yellow flag, jump on it!
Then after you fix it, let your bank know what has happened and how it has been resolved. This not only comforts the bank but builds trust. If the yellow flag starts turning red, alert the bank and outline the consequences. This helps you prepare and for the bank to prepare. Procrastinating this step can result in devastating consequences. The bank may be able to help you if you give them enough time.
Start identifying and tracking those KPIs that influence your debt covenants. For help and tips on how we measure KPIs, download our KPI Discovery Cheatsheet today! Know your numbers and where your company is the weakest so that you can start turning around your future.

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Adjusted EBITDA

Adjusted EBITDA

Adjusted EBITDA is a valuable tool used to analyze businesses for the purposes of valuation and potential acquisition. It is also called Normalized EBITDA because it systematizes cash flow and deducts irregularities and deviations. Use adjusted EBITDA as an additive measure to determine how much cash a company may produce annually and is typically used by security analysts and investors when evaluating a business’s overall income; however, it is important to note business valuation using Adjusted EBITDA is not a Generally Accepted Accounting Principles standard and should not be used out of context as various companies may categorize income and expense divisions differently.

EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization and is a meaningful measure of operating performance as it allows businesses and investors to more fully evaluate productivity, efficiency, and return on capital, without factoring in the impact of interest rates, asset base, tax expenses, and other operating costs.

Adjusted EBITDA is a useful way to compare companies across and within an industry. Many consider it a more accurate reflection of the company’s worth as it adjusts for and negates one-time costs such as lawsuits, start-up or development expenses, or professional fees that are not recurring, just to name a few. More importantly, adjusting EBITDA often reflects in a higher sale’s price for the owner.

Adjusted EBITDA Margin Calculation

Adjusting EBITDA measures the operating cash flow using information acquired from income statements. Measure it annually. But when you average it over a three to five year period in order to account and adjust for any anomalies, it is most beneficial. Generally speaking, a higher normalized EBITDA margin is preferred, and the larger a company’s gross revenue, the more valuable this new measurement will be in a future acquisition.

(Are you in the process of selling your company? The first thing to do is to identify “destroyers” that can impact your company’s value. Click here to download your free “Top 10 Destroyers of Value“.)

Typically, analysts will then normalize or adjust the standard EBITDA by considering other expenses outside the operating budget. Adjusted EBITDA is found by calculating the Net Income, minus Total Other Income (Expense), plus Income Taxes, Depreciation and Amortization, and non-cash charges for stock compensation.

At this point, you are probably curious how to calculate Adjusted EBITDA. The following is a simplified example of how you might begin calculating this formula for your business. Start with EBITDA; then add back value to your company by considering areas of excess and factoring in one-time costs.

Screen Shot 2016-06-08 at 9.24.05 AM

Differences between EBITDA versus Adjusted EBITDA

EBITDA and Adjusted EBITDA have a few key differences. EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization, identifies a company’s financial profits by calculating the Revenue minus Expenses (excluding interest, tax, depreciation and amortization). It compares profitability while excluding the impact of many financial and accounting decisions. The EBITDA margin is an assessment of a company’s operating profitability as a percentage of its total revenue. Calculating the EBITDA margin allows analysts and investors to compare companies of different sizes in different industries because it formulates operating profit as a percentage of revenue.

Adjusted EBITDA, on the other hand, indicates “top line” earnings before deducting interest, tax, depreciation and amortization. It normalizes income, standardizes cash flow, and eliminates abnormalities often making it easier to compare multiple businesses. Examples of when you need to account adjustments while evaluating the value of a company for a buyer include:

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Adjusted EBITDA

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Adjusted EBITDA

See Also:
EBITDA Valuation
Calculate EBITDA
Valuation Methods
EBITDA Definition
Multiple of Earnings

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What Business Issues Keep You Up?

As a business owner, I often find myself lying awake at night worrying about issues my company is facing.  Are we making as much money as we should be?  How is my cash flow?  Do I have the right team to grow the business?  These are just a few of the questions that cause me to lose sleep.

What Business Issues Keep You Up?

My guess is that I’m not alone in my insomnia, and I was curious to know what issues are keeping others up at night.  I put together a brief survey of some common business issues and solicited responses from my clients, colleagues, referral partners and members of our LinkedIn group.  I asked them to rate these issues on a scale of 0 (sleeping like a baby) to 5 (Ambien please!).  Here are the results so far:

 

up at night survey graph

 

Based upon these results, it appears that cash flow issues are currently demanding most of your attention.  Not surprisingly, managing growth comes in a close second as rapid growth is often the chief cause of cash flow problems.  I’m curious to see if turnover will become more of an issue as the economy continues to stabilize and employees begin to seek new opportunities.

What financial issues do you think are the most pressing for your company?  We’d love to have your input, so click here if you haven’t had a chance to submit your answers yet.  Stay tuned for updated results…

To learn more financial leadership skills download the free 7 Habits of Highly Effective CFOs.

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