So, there was this business owner sitting at my desk at the edge of desperation seeking another loan. No working capital, little equity and lots of debt. It was a nightmare. The person left with little hope as I pledged to re-crunch the numbers. Unfortunately, the numbers never came together.
That same day, another business owner came to my desk and we spoke for a few minutes. After a short call to credit administration, the customer left with a commitment for a $1 million signature (unsecured) loan at a rock-bottom interest rate.
By Benjamin Gisin
Professional life includes 20 years banking and 20 years consulting financially distressed enterprises. Experience from the perspective of a banker and then as a borrower advocate provided insights applicable to a broad range of economic players. Ben can be contacted at businesslogicusa.com on the contact us page.
That same day, another business owner came to my desk and we spoke for a few minutes. After a short call to credit administration, the customer left with a commitment for a $1 million signature (unsecured) loan at a rock-bottom interest rate.
By Benjamin Gisin
Professional life includes 20 years banking and 20 years consulting financially distressed enterprises. Experience from the perspective of a banker and then as a borrower advocate provided insights applicable to a broad range of economic players. Ben can be contacted at businesslogicusa.com on the contact us page.
Working Capital Is Not Borrowed Money, It Is…
Working capital is not borrowed money from a bank, but rather company-owned liquidity. Companies that have a stash of their own capital may have a larger advantage than first meets the eye. Perhaps its time to consider working towards having that stash?
Consider the comparisons below:
Consider the comparisons below:
ABC Company
Strong Working Capital
XYZ Company
Weak Working Capital
Both companies are in the same line of business, the same size and in a mature industry.
Management Philosophy
ABC Company
Management sees working capital as a key that opens doors, provides cost savings opportunities and a cushion for adversity.
For every hour spent figuring out how to borrow money, two hours were spent figuring out how to increase cash flows without borrowing.
For every hour spent figuring out how to borrow money, two hours were spent figuring out how to increase cash flows without borrowing.
XYZ Company
Management sees working capital as borrowed money from any lender that will approve them. Access to credit was the key to expansion, profits and meeting payroll.
The owners’ practice is to take out money from the company liberally.
The owners’ practice is to take out money from the company liberally.
Financing Day-To-Day Operating Costs
ABC Company
The Company has achieved self funding in its day to day operations. The earnings left in working capital did have a tax bill.
Their $160,000 of paid inventory, paid accounts payable and some cash in the bank cost $55,125 in taxes at a 35% tax rate.
Their $160,000 of paid inventory, paid accounts payable and some cash in the bank cost $55,125 in taxes at a 35% tax rate.
($55,125)
XYZ Company
Operating costs were financed by using operating lenders and liberally leaning on trade creditors. The company was familiar with robbing Peter to pay Paul.
Current liabilities averaged $140,000 at a blended interest cost of 12 percent. At $16,800 a year, the cost for 5 years is $84,000.
Current liabilities averaged $140,000 at a blended interest cost of 12 percent. At $16,800 a year, the cost for 5 years is $84,000.
($84,500)
Discounts for Cash and Volume Buying
ABC Company
Working capital allowed the company to buy inventory several months at time for a volume discount. Discounts for cash on payables were always used.
ABC’s controller estimates savings at $30,000 per year - a savings of $150,000 over 5 years.
ABC’s controller estimates savings at $30,000 per year - a savings of $150,000 over 5 years.
$150,000
XYZ Company
Without working capital to take advantage of cash discounts or volume purchaes, no savings are achieved.
Overdraft fees, small claims fees, and attorney fees averaged $5,000 a year - $25,000 over 5 years.
Overdraft fees, small claims fees, and attorney fees averaged $5,000 a year - $25,000 over 5 years.
($25,500)
Equipment Purchase – $200,000 Market Cost
ABC Company
The company controller knows future cash flows are directly impacted by the total cost of working assets.
Equipment quality, the amount financed and interest rates dramatically reduces claims on future cash flows.
Paying cash for parts at the dealer where the equipment was purchased resulted in being able to negotiate $25,000 off the price and limited warranty.
With compensating balances at the bank, a strong down payment and a shorter loan amortization (5 years) ABC got a 5% rate.
Equipment quality, the amount financed and interest rates dramatically reduces claims on future cash flows.
Paying cash for parts at the dealer where the equipment was purchased resulted in being able to negotiate $25,000 off the price and limited warranty.
With compensating balances at the bank, a strong down payment and a shorter loan amortization (5 years) ABC got a 5% rate.
Down payment -
$50,000
60 payments of $2,358.90 -
$141,534
Total cost -
$191,534
XYZ Company
By always stringing out the equipment dealer’s invoices, and good demand on the equipment being purchased, no discount could be negotiated.
Without a down payment, a lower cost bank loan was not available.
The company had to go with a more expensive leasing company (12 percent rate) and for 7 years to keep payments down.
Without a down payment, a lower cost bank loan was not available.
The company had to go with a more expensive leasing company (12 percent rate) and for 7 years to keep payments down.
Down payment -
$0
84 payments of $3,530.55 -
$296,566
Unanticipated repairs -
$30,000
Total cost -
$326,566
Cost above ABC Company: $135,032
A 6,000 Sq. Ft. Warehouse
ABC Company
In anticipation of the warehouse, the company purchased a 1 acre lot ($75,000) several years ago.
The contractor bid was $425,000. The company also had a cash down payment of $100,000.
With a reputation for being thrifty, limited use of credit, good down payments their debt load was low and cash flows provided ample margin. They got a bank loan for $325,000 @ 5.50% for 10 years.
The contractor bid was $425,000. The company also had a cash down payment of $100,000.
With a reputation for being thrifty, limited use of credit, good down payments their debt load was low and cash flows provided ample margin. They got a bank loan for $325,000 @ 5.50% for 10 years.
I acre investment -
$75,000
Down Payment -
$100,000
120 payments of $4,663 -
$559,560
Total cost -
$734,560
XYZ Company
Unable to qualify for financing the building of a warehouse, XYZ had to find other options.
They found a developer that would build out the facility on a lot and lease it back.
The lease payment was based upon $1.25 square foot.
They found a developer that would build out the facility on a lot and lease it back.
The lease payment was based upon $1.25 square foot.
120 payments of $7,500 -
$900,000
Cost above ABC Company - $165,440
Monthly payments are $2,837 more.
Financial Oversight
ABC Company
The company controller follows all financial accounts that impact working capital.
Included in the review for accuracy and handling are cash (bank statments), accounts receivable (customers), inventory, accounts payable (suppliers) and debt payments/levels. Following working capital is akin to following the financial pulse of the company.
Because working capital is the first synthesis of profits and liquidity, most months there is an office celebration as working capital moved upwards.
Recently, an anomaly was noticed in accounts payable - a $1,700 invoice by a vendor not familiar to or approved by the company.
Upon checking, the controller found that a bookkeeping clerk was getting ready to pay the invoice and deposit the amount in a personal account at another bank.
There ultimately was no financial loss, and a reminder that good financial oversight protects employees as well as the company.
Included in the review for accuracy and handling are cash (bank statments), accounts receivable (customers), inventory, accounts payable (suppliers) and debt payments/levels. Following working capital is akin to following the financial pulse of the company.
Because working capital is the first synthesis of profits and liquidity, most months there is an office celebration as working capital moved upwards.
Recently, an anomaly was noticed in accounts payable - a $1,700 invoice by a vendor not familiar to or approved by the company.
Upon checking, the controller found that a bookkeeping clerk was getting ready to pay the invoice and deposit the amount in a personal account at another bank.
There ultimately was no financial loss, and a reminder that good financial oversight protects employees as well as the company.
XYZ Company
Unaware that 30% of businesses fail due to internal theft, the company felt it was saving money by cutting bookkeeping costs.
A salesperson - who negotiated a large and profitable contract a year earlier - asked why profits were not up? Management discovered many paid invoices to several unapproved suppliers.
A forensic accountant was hired. He found that $120,000 in payments went into the account of their bookkeeper’s spouse.
To get financing for the current year, their bank set benchmarks for improved profits and working capital. The theft put the company into default at their bank.
A salesperson - who negotiated a large and profitable contract a year earlier - asked why profits were not up? Management discovered many paid invoices to several unapproved suppliers.
A forensic accountant was hired. He found that $120,000 in payments went into the account of their bookkeeper’s spouse.
To get financing for the current year, their bank set benchmarks for improved profits and working capital. The theft put the company into default at their bank.
Cost of Loss -
$120,000
Forensic Accountant -
$15,000
Legal Costs -
$17,500
Bankruptcy and related costs -
$100,000
Total cost -
$252,500
A Chance to be in Business another Day
ABC Company
Since 2008, the economic and financial landscape has changed. The return for investing cash in bank CD’s or other financial investments is just a fraction of the opportunity to use that cash to build the company and save the company money.
Due to their ongoing savings, the company found the extra cash to reward the employees that worked the hardest and smartest. The resulting productivity gains further added to the company’s profits.
Due to their ongoing savings, the company found the extra cash to reward the employees that worked the hardest and smartest. The resulting productivity gains further added to the company’s profits.
XYZ Company
There are some company’s that emerge from bankrupcty to be in business another day.
Fortunately, the XYZ company suppliers saw the XYZ owners and managers as honest and hardworking, who convinced everyone they learned from their lessons. The suppliers, who were not crammed down in the bankrupcty, decided to help XYZ.
The company turned a new leaf and adopted a strategy to build working capital and broader company equity.
Fortunately, the XYZ company suppliers saw the XYZ owners and managers as honest and hardworking, who convinced everyone they learned from their lessons. The suppliers, who were not crammed down in the bankrupcty, decided to help XYZ.
The company turned a new leaf and adopted a strategy to build working capital and broader company equity.
The Business Pulse Manager
Congratulations, you made it through the sagas of ABC and XYZ companies. While there are many things that contribute to business success, effective financial oversight, control and working capital are not “electives” that can be done without.
This is why we created our flagship product - the Business Pulse Manager. A strategic routine to reivew key financial arenas while calculating and following working capital. It is our hope that this routine will help your business avoid many of the pitfalls that other businesses have suffered under.
You can think about this product like a Chief Financial Officer or Controller assistant. Just because a business cannot staff for a Chief Financial Officer or Controller, does not mean their functions can be overlooked. This is your key to unlocking the power of capital.
By Benjamin Gisin
Professional life includes 20 years banking and 20 years consulting financially distressed enterprises. Experience from the perspective of a banker and then as a borrower advocate provided insights applicable to a broad range of economic players. Ben can be contacted at businesslogicusa.com on the contact us page.
This is why we created our flagship product - the Business Pulse Manager. A strategic routine to reivew key financial arenas while calculating and following working capital. It is our hope that this routine will help your business avoid many of the pitfalls that other businesses have suffered under.
You can think about this product like a Chief Financial Officer or Controller assistant. Just because a business cannot staff for a Chief Financial Officer or Controller, does not mean their functions can be overlooked. This is your key to unlocking the power of capital.
By Benjamin Gisin
Professional life includes 20 years banking and 20 years consulting financially distressed enterprises. Experience from the perspective of a banker and then as a borrower advocate provided insights applicable to a broad range of economic players. Ben can be contacted at businesslogicusa.com on the contact us page.