A Tale of Two Companies and Their Banks

“It was the simplest of times, it had been the worst of times, it was… “, well, you get the image . Over the past several months i have been consulting with two separate companies as an outsourced CFO. Both companies need bank financing to stabilize their operations and achieve growth, both companies have struggled through trying economic times, both companies know they have to take a position in processes, procedures and personnel so as to grow and achieve desired returns for his or her owners. i would like to share with you ways these two companies are working through the method of structuring bank loans, hiring personnel and investing in internal systems so as to develop companies which will deliver desired shareholder returns. But first, some background information.

Company A has been alive for just over 4 years. the corporate acquired the assets of an existing business and within the first 3 years grew the operations in more than 15% per annum . including a strategic acquisition, Company A is now almost twice the dimensions of the business it acquired.

Margins are good and therefore the company has been ready to distribute cash to the owner annually . With the rapid rise within the business the corporate was stretching its internal processes and personnel to the limit. Additionally, existing systems and equipment needed to be upgraded so as to support future growth.

In the middle of year 4 the storm clouds began forming for Company A. the corporate needed to rent additional personnel to manage the expansion it had experienced and to support anticipated continued increases in revenue.

Unfortunately the rapid rise of the business meant that woefully stressed systems and personnel cause quality lapses which resulted in several large customers leaving for competitors. Additionally, two management team members left the corporate and began a competing business. They took other customers by offering cheaper prices for similar services. Hurried investments in capital equipment that were designed to scale back labor costs were being run inefficiently and had resulted in large increases in supply expense. Company A was now losing money and needed to form changes quickly so as to right the ship. Additionally, the company’s current bank debt needed to be refinanced so as to alleviate income concerns.

Company B has been alive for just over 5 years. the corporate was a start-up that the owner was ready to bootstrap to realize recurring revenue levels that allowed the corporate to realize profitability quickly. income was the main target and therefore the company had been ready to return cash to the owner annually . the corporate had been built with the owner overseeing all strategic initiatives and managing all activities of the corporate . because the company grew the operations of the business could not be effectively managed by a private person.

During year 5 the owner of Company B realized that experienced personnel needed to be brought on board to effectively manage the business. Prior growth had been funded through customer advance payments and therefore the company had no bank debt.

As recurring revenue was building it had been time to form the acceptable investments in personnel and systems so as to require the corporate to subsequent level. Personnel hiring would be critically managed and coincide with incoming take advantage order to manage the new expenses on a cash positive basis. New customer opportunities were growing and would be funded partially by bank debt along side customer advance payments. Company B was starting to show profitable operations and needed to form the proper investments so as to manage growth.

Both companies needed assistance so as to manage through the difficult times they were experiencing. So which one would fair better in discussions with the bank given their circumstances?

Things were looking rather bleak for Company A. Various missteps resulted in losing customers and allowing former management team members to start out a competing business. Personnel were hired too late to alleviate quality concerns and now there have been too many employees to support the prevailing business. Capital equipment investments that were alleged to reduce labor costs had dramatically increased supply costs and further draining cash from the corporate . Current bank terms had put the corporate during a position where the road of credit was continuing to extend due to the losses from operations. the corporate needed to refinance existing bank agreements so as to avert a situation that would cripple the business.