Business is war: Jack Tramiel’s secret to conquering Silicon Valley StartupSmart Vertical integration is where you grow your company by buying or starting a number of businesses along the same supply chain in one industry at different stages of…
Douglas E. Castle‘s insight:
Business might indeed be war, but in many cases bridge-building assists in the process of the ultimate conquest.
As a firm believer in vertical integration (a company buyer its customer or its supplier) and in thereby becoming a combined and more self-sufficient entity, both larger, and more powerful with certain expenses redundancies to be eliminated to assist in boosting combined profitability, I have found that it’s much more important to befriend and negotiate [sometimes that feels like war] with a prospective acquiree company and its management, usually on several levels, in order to "educate" it regarding the advantages to its best longer-term interests, such that it comes along as a willing and smiling captive instead of utilizing any other, more hostile strategy, which would be a secondary choice.
The idea is to conduct the war utilizing intelligence (informational), diplomacy, education and negotiation in such a manner that your target never even knows that any war was occurring.
As the late lawyer (for the famous O.J. Simpson murder trial) Johnny Cochran might have said: "If you want to agressively integrate, you must educate and negotiate."
A temporary cash crunch situation is something that occurs in the ordinary course of business in most every organization, especially when the business is of a seasonal nature or when the businesses is in a rapid stage of growth, i.e., inundated with purchase orders but without sufficient cash to fill them and to also pay recurring expenses. But if a cash crunch situation is chronic, a diagnosis of the reason must be made, and appropriate actions must be taken. This article will give you the ability to do both.
Bear in mind that when I speak of revenues, I mean total sales, both as computed on the cash basis and the accrual basis, but when I speak of expenses, I actually mean cash outflows of every nature. Throw away the accounting and auditing textbooks for just a bit so that we can deal with bare bones economic reality. Also by current, I mean as either generated or paid in the ordinary course of operations.
Most every enterprise experiences a period or periods of cash crunch, especially if those businesses are either seasonal or rapidly-growing companies which are generating purchase orders, but do not have adequate cash to fill them while still meeting their obligations, such as payroll, occupancy and the like. There are remedies for both of these situations because they are either predictable or can be financed with short-term debt to enable them to either withstand the “tight season” or to let their cash flow catch up with their market demand.
If cash crunch is chronic, and is an ongoing problem, there is something wrong with the business on a fundamental level. Either revenues are too low, or current expenses (outflows — remember that we’re using lose terminology here) are too high.
If the expenses or outflows are not truly for operations but payable to a lender in the form of , for example, a short-term self-amortizing debt where the payments are large and swollen with principal, the lender may be negotiated with to arrive at an interest-only loan with a provision for a rollover of the principal at the end of its term (optimal for maximizing utilizable cash flow), or possibly a longer amortization period where the payments are lower, conserving more cash flow for operations.
Sometimes a business is improperly capitalized and it requires equity to be infused in order to retire debt. Many businesses which have good fundamentals need to de-leverage themselves by retiring existing debt with equity. This is appropriate unless the equity is used to cover current expenses.
The test is this: If you deduct the debt payments from the total current outflows, and you subtract the number obtained thereby from the revenues, the resulting number should be positive. This means that the business is not properly capitalized, but is probably fundamentally sound. These companies are good candidates for refinancing.
If the number obtained is still negative, then it is highly likely that the business is fundamentally unsound, either due to its core purpose, mismanagement or some improper assumptions which have gone uncorrected for too long. Revenues can be increased by increasing sales through better marketing and sales, or by increasing prices if the market will tolerate this.
When certain food or beverage prices are suddenly increased, a restaurant may hike up its prices and say, for example that “due to the increase in the cost to us of coffee, we are sorry to have to raise the price per cup to $2.25. If the market tolerates this it is a wonderful strategy, especially if done in steps, or if accompanied by a re-packaging or the product or service to somehow differentiate it from what it was previously. The perception of added-value tends to justify an increase in price.
The other possibility is more difficult, and the prospects less pleasant: You may have to negotiate with your employees (or terminate some of their positions), cut back on the use of your contractors, or re-negotiate costs with your vendors. Vendors can often be persuaded to reduce their charges by 1) indicating that the situation is temporary, and that they’ll receive a premium after you’ve reached a certain sales level or after a certain amount of time has passed or 2) an incentive wherein the vendor participates in either your revenue when you’ve reached a certain threshold, or in you company’s ownership (this is an example of a partial vertical integration strategy).
The acid test of the fundamental soundness of any simple business model is this: If debt service is eliminated, do revenues exceed current expenses. Put more realistically, without considering debt, do your revenues (where the earnings process is complete and they are either in the form of cash or accounts receivable) consistently exceed your ordinary current operating outflows including product (inventory purchases as required) or service purchases? If not, can they be restructured to fit the aforementioned parameters? If the answer to both questions is “no,” your business model is fatally flawed, and that must be dealt with — we’ll discuss this at another time.
If you increased your sales volume, increased your prices to customers, eliminated any idle personnel, negotiated with your suppliers, and gotten your bank loan replaced with equity, then you still may be suffering because your customers are not paying you on a timely basis, while you’re paying your vendors promptly.
If your average days to payment on your accounts receivable is 55, and your average days to payment of your current expenses is 35, that 20-day discrepancy can be killing your business, depending upon your profit margins. Sadly, you can’t pay your vendors with your receivables. There are two things to be done to eliminate that 20-day discrepancy:
1) Collect the receivables faster; and
2) Pay your vendors more slowly.
That gap between average days that your business waits to collect its receivables, and the average days its takes to pay its vendors must be reduced to zero, or to a negative number.
You can collect your receivables faster by offering some of your less creditworthy customers less credit, and giving some of your better, faster-paying customers more credit. You can offer early payment incentives or cash payment discounts. You can collect partial payments in cash. Use some imagination. Any of these approaches alone or in combination will cut that 55 days significantly if you focus on achieving this.
You might even get a line of credit up to some percentage of your “acceptable” accounts receivable, factor your receivables, or utilize single invoice financing in order to get that number down a great deal further. Often the real cost of factoring or similar arrangements is about equal to what you might sacrifice if all of your customers took advantage of a discount for paying in less than 30 days.
To eliminate turning a simple article into a doctoral dissertation, suffice it to say that slowing down payments to your vendors requires some diplomacy, some negotiation, and some creativity — but then, if you are in business in these times, you must have an abundance of creativity.
Quick, Easy Metrics:
1) Your average collection days on your receivables (it’s a weighted average) should equal or exceed your average payment days on your current bills;
2) Your average collections days on your receivables divided by your average payment days on your current bills should be equal to or (hopefully) greater than 1.0;
3) The value of all of your cash and all of your receivables divided by the amount of your current bills should always be significantly greater than 1.0 (i.e., no contribution margin). While this is not a measure of cash availability, it is a measure of your gross profit on sales. The bigger the dividend produced by this computation, the greater your basic profit margin and the greater the contribution of your sales to ultimately cover fixed overhead.
The idea is to avoid a cash crunch (assuming that your basic business concept is fundamentally sound) by collecting and hoarding as much cash as you can, and holding off on the payment of bills as long as you can. Remember: If you business is sound, a cash crunch crisis is a phenomenon only created by bad timing. And it’s quite curable.
In industrialized nations, particularly the USA, the prevailing attitude is in either 1) the instant success or in 2) the disposable item. That disposable item can be a small to medium-sized business which is experiencing some financial turmoil and might well be on the road to Reorganization pursuant to Chapter 13, and more often than not, to a Chapter 7 liquidation proceeding.
The terms and notions associated with business “repairs,” or outright cures such as turnarounds (i.e., turnarounds leading to sustainable solvency with a healthy and consistent positive cash flow), restructurings, negotiations, workouts, re-amortizations, debt-equity conversions, debt-service coverage increases, re-budgeting, a Re-Emergence Plan, creditor settlements, investor arrangements, employee buy-in /buyout plans, and management buy-in/buyout plans. [Please feel free to look under the DEFINITIONS Section in this blog’s navigation bar if any or all of the foregoing terms seem or seems unfamiliar to you.]
The calculus of this focus on start-ups to the extent that troubled businesses have become neglected or stigmatized as “corporate raider targets (Dell Computer, anyone?) or “extinct” simply because they are not genesis centers for new technologies, or because they do not have venture capital curb appeal (anyone interested in saving a ball bearing or paper clip manufacturing business? – I can hear your deafening silence as I watch [I can’t literally look at you through your computer or device, but I like to be as fearsome and awe-inspiring as possible] you look down in shame at the floor).
You don’t have to be a calculus superstar to visualize that a small start up entity might create five jobs this year, and fifteen next year, and perhaps a number more (if they are not bought up by Google, in which case, some of those jobs will likely evaporate into a consolidation), while saving the Cruddleston Corrugated Packaging business [fictitious, but which would possibly be located in in the “Rust Belt” of the USA or near Newark, New Jersey] might conserve 80 existing and productive jobs, and might create new employment (perhaps another 10 – 20 permanent full-time positions as well as some precious student internship training.
Perhaps the bloom is off of the proverbial rose when it comes to manufacturing and industrial businesses in the small ($1 million up to $100 million in sales revenues) to medium-sized ($100 million up to $500 million per year in sales revenues) sectors. Part of the difficulty is that these businesses cannot necessarily be fixed and set on the right trajectory without investing some serious analytic, planning and implementation time. Negotiations, correspondence, restructuring and a multitude of changes, some of which will be painful but which are necessary, will have to be implemented and monitored. This usually requires the retention of an outside specialist, in additional to legal counsel — there are a plethora of law firms, but very, very few positive-minded, tough turnaround advisors (or business leaders of this age in general) who understand that 1) not every business problem can be cured by throwing bundles of cash at it, and 2) that it is not pre-ordained by any “Higher Authority” that because a business has problems that they must be fatal.
If these prospectively viable turnaround clients fail (and it isn’t a failure which is based upon technological obsolescence or a colossal and uninsured legal judgment or settlement) it is because they were convinced that they could never recover, and that the path most frequently taken is either directly to Chapter 7 or being on Chapter 13 “life support” – with the expectation of a fatality so no restructuring and Re-Emergence Plan is even hinted at. Working to save the company and its jobs is definitely the road less traveled. Death of the entire mid-section of America — which is not the true subject addressed by the JOBS Act or anyone’s legislative, regulatory or professional menu — has been occurring at an increasing rate, and is perceived as a self-fulfilling prophesy.
In my professional capacity, I am keenly aware that most company owners, management, directors or even legal counsel do not know who to turn to to perform this type of special precision surgery.
The problem is one of epic proportions. The following statistics for court bankruptcy filings of businesses were provided by The American Bankruptcy Institute for the entire United States, based upon data accumulated from judicial records:
Quarterly Business Filings by Year (1994-2012)
You’ll note that the highest number of filings was in 2009, one year following the central banking system and capital markets meltdown that decimated this country’s economy, with the rest of the Global Economy to follow soon thereafter.
One insidious implication, referring again to the above table, is that businesses in the United States (as well as their clients and consumers) were so dependent upon access to credit and the expectation of serial refinancing to prop up cash flow, that they had no cushion of equity in the form of cash reserves, and the other implication was that these companies were taking some liberties with what they considered to be collateral assets, profits and earnings.
These companies, and their legal representatives where virtually running to the courthouses to throw their businesses away. They were collapsing like dominoes, and the overwhelming negativity in the emotional drivers of the economy accelerated this flight to the express route. Many of these companies were unaware that possibilities existed for a reversal of their fortunes — and those who actually thought of the possibility of a means of saving the business by bringing an outside expert inside simply did not know where to find an expert.
Applying some simple and strictly hypothetical assumptions to the numbers set forth in the above table for the second calendar quarter of 2012, let us say that :
10% of the companies (that’s 1,037) could have been saved;
That each company, while operating at full capacity, had on average of 75 full-time employees;
That if all of those existing jobs could have been saved, the total of persons seeking unemployment assistance or very low-paying jobs would have been reduced [just for that quarter!] by 77,779.
I believe these numbers to be reasonable.
In sum, companies do not have to die for their mistakes, transgressions and lack of adequate stewardship. There is help for them. It shouldn’t be a secret.
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