B2B CFO^®    (877) 4-B2B CFO

IBM recently released The 2010 Global CFO Study entitled “The New Value Integrator”.  The 2010 Global CFO Study – the largest known of its kind – involved more than 1,900 CFOs and senior-level Finance professionals from 81 countries and 32 industries.  Their study points to the value to an organization of a CFO who can provide strong Business Insight as well as drive Financial Efficiency.   The CFO who can provide both, the “Value Integrators”, have been able to achieve sustained performance advantages over the other three CFO Profiles.  Over the 5 year period from 2003 to 2008, by implementing common practices across finance and from their strong business insight capabilities showcased by their mature analytical capabilities they were able to achieve a 20X (that’s right – TWENTY TIMES) better EBITDA than all other enterprises, 49% greater revenue and 30% higher ROIC than all other enterprises.  Maturity and analytical experience brought to bear on the exceptional business “opportunities” the companies faced.

The Four CFO Profiles are Scorekeepers, who are low on Financial Efficiency and low on Business Insight.  They are characterized as Data recorders (“the facts, just the facts ma’am”), practicing more Controllership – rearview mirror perspective and Multiple versions of the “truth”- great with the “what if’s” but not with the “what do they mean’s”.  Disciplined Operators are those who are high on Financial Efficiency but low on Business Insight.  They are characterized by their Finance operations focus, their ability to provide information – “you want the information, they have it”, and by Performance interpretation – “here is what happened and why”.  Constrained Advisors are those who are low on Financial Efficiency but High on Business Insight.  They are analytics focused but then have sub-optimal execution – they are simply working off of bad information. Their organizations produce incomplete data that doesn’t hold together.  Finally Value Integrators who are high on Financial Efficiency and high on Business Insight.  They are characterized by performance optimization – constantly applying lean-like principles to standardize and simplify the information gathering process.  They provide predictive insights – “if we do this, then that will happen” and use this analysis to evaluate the enterprise risk of each decision option so that management can anticipate and mitigate that risk i.e.  “if that happens, this will be the risk to the organization” and finally business decision making – they simply think like a businessman, not an “accountant”. 

Experience drives the ability to look both backward and forward, which is a key differentiator for the Value Integrator.  They look at not only what they “can” do but what they “should” do – and move towards the “should” constantly.  They automate common metrics so that the information is available on an as needed basis.  They look at key metrics for the organization that both reinforce the strategy but also reveal the competitive landscape.  No two companies are necessarily the same, based on their size, industry and competitive differences, so they don’t try to shoehorn standards that don’t apply.  Does your company spend more time arguing about the validity of the analysis than the implications? Part of the problem is how the data is accumulated – by hand in a manner that isn’t timely.  How can accounting obtain efficiencies – by eliminating spreadsheet solutions wherever possible and integrating solutions into the existing ERP system, so the data is always current, redundant keystrokes are eliminated and time spent creating data is spent analyzing data.  At B2BCFO, we excel at implementing the right size accounting systems.  Our Quickbooks background vastly improves our efficiency for companies below $50 million in sales.  By properly implementing the systems that most companies have already purchased and by training the staff in how to use those tools, information quality and flow increase significantly.  Larger organizations, as large as Unilever Europe, outsource their Finance and Administrative functions.  With B2BCFO, mid-sized companies can obtain the same efficiencies.

Why B2BCFO?  Because we are value integrators who first improve the efficiency of the financial information by cleaning the data, eliminating redundancies, putting information on line, and creating standards “The path toward efficiency often starts with a common baseline understanding of the scope of activities and services that Finance delivers, as well as the resources and costs that the function consumes. This enables the identification and prioritization of short-term, mid-term and long-term opportunities that delineate a Finance vision and the business case and implementation plan needed to gain the buy-in to proceed with a transformation program.”  When the information is good, the B2BCFO takes the “opportunity to implement key measures and balanced scorecards and use them to drive the right behaviors across the enterprise. These measures become the thread that binds the strategic, portfolio and operational planning cycles. Developing the right targets and closing performance gaps with speed and dexterity help ensure that the business as a whole is continually executing against its strategy.” Each B2BCFO has at least 25 years of experience in a variety of organizations.  This breadth of knowledge enables the B2BCFO to provide insights beyond those with single industry experience.  Each B2BCFO can draw on the experience of over 160 fellow partners to provide perspective and insight beyond what a single individual can provide.  Shouldn’t you hire a B2BCFO partner so you can have a “Value Integrator” of your own.  It is your first step to world class performance results.

Locally we go through a “loan renewal season” for smaller bank customers.   It comes after tax season, so that the owners can provide their tax returns to their bankers.  Sometimes these are the first financial statements the owners have seen for the whole year.  This year, being my first Loan Renewal Season since becoming a partner at B2B CFO®, I paused to reflect on how relationships, whether banking or social, tend to have the same elements and how we can learn from the experiences.

“A relationship requires a lot of work and commitment. “  Greta Scacchi . 

Remember it is called a “Loan Commitment”. When Bankers make a Loan Commitment to your company, they become investors in your business.  Once a year they are required to review their investment and their relationship, to determine if they want to reinvest.  Bankers gather the company’s annual financial information and forward it to their underwriters to analyze the performance and prospects of the company.  With large customers with large transactional needs, the amount of data available – and required- is significant and can tell those bankers what they need to assess their investment.  The financial information for larger companies is easier to analyze because there are similar, public companies to benchmark against.   Bankers for smaller customers must be able to add context to the financial information, this context based on their understanding of the business gained through their personal and professional relationship with the owner of the company.

“Never assume that the guy understands that you and he have a relationship”  Dave Barry

Smaller customers, $30 million and less in size, are often in market niches where there aren’t public companies to benchmark against.  They depend upon their relationship with their banker, and the “soft” non-financial information he has gained through his interactions throughout the year to add context to the financial data they provide.  The two aspects of that “soft” data are intensity and duration.  Intensity speaks to the degree of connectedness the company has with the bank and the banker.  From the bank’s perspective, is it a single loan, or is the bank handling payroll processing and other service needs as well? How has the company performed using those services.  From the Banker’s perspective, how often do the customer and the banker meet and talk about company issues, the economy, and perhaps even golf scores?  What is the frequency that the customer provides financial information – monthly, quarterly or annually?  The customer often confuses the difference between the banker and the bank.  The Intensity of the relationship with the bank itself is determined by the breadth and depth of the bank services that the company uses.  The Intensity of the relationship with the Banker is based on the time and the information exchanged with the Banker.  The duration is dependent on how long the relationship has existed.  The Banker prefers to write a commitment with someone they have known. 

Some customers have noticed that bankers have taken control over the intensity of the relationship.  The banker isn’t the “Bank”, but they are the Bank’s representative, so he is bound to convey the Bank’s interests when he advocates the commitment.  Banks have changed reporting requirements,  increasing the frequency, quantity and quality of the financial information they receive.  All bankers are implementing requirements for projections and annual business plans, information previously requested of larger customers.  As an on-demand CFO, I am frequently called on to work with companies that have never put together a business plan forecasted their cash needs or reported monthly.  Now, when approaching a bank for a loan or loan renewal, make certain you have complete and up-do-date information concerning the present financial situation of your business. This would include, at a minimum, the business plan, your personal balance sheet, business forecasted and historical financials, and 13 week cash flow projections.  Your B2B CFO^® can help create and maintain these required documents.

In today’s economy, bankers need to understand that the business owner has a vision, a direction for the business in the long term.  Understanding this vision helps the banker to anticipate when additional needs will arise due to growth, replacement of worn equipment, or responses to the company’s customer demands.  Formal meetings should include the owner or president of the company, the B2B CFO^® and the banker so that financial concerns can be dealt with quickly, with the focus of the meeting is less on past performance and more on the future prospects.  Your banker will want to review your company’s performance against the projections he received at the beginning of the year and will want to understand the actions the company is taking to correct or continue the performance.  With your B2B CFO^® by your side, your relationship with you banker will satisfy both your company’s needs and the Bank’s for years to come.

The other night I went to a meeting of the Turnaround  Management Association.  The program was titled “Is the Turnaround Community Missing the Mark?”  The presenters, SVP’s of Special Assets from M&I Bank, Park Bank, Associated Bank as well US Bank, had a unified message.  They are all very busy – the current economy has strained a greater number of their bank’s relationships than ever before.  The sheer volume of the transactions that they are handling now is staggering.  But the one thing that each of them agreed upon is that by the time the relationship lands in their department there is very little left to be done.  They have to move quickly to preserve the value left to reduce losses, so frequently their interaction with turnaround professionals at that point is to aid in either an orderly liquidation or a sale of the company.

The question was then asked by one of the attendees “If it seems that most of the loans are at the point of liquidation when they arrive in your department, where in that continuum of Valued Client to Liquidation would it be better for the Turnaround Professional to engage with your customer?”  Tim Bruckner of M&I Special Assets agreed with Paul Niedermeyer from US Bank – the single greatest impact on an account can be made by the commercial lending officer.  They agreed that if the line officer takes action more quickly with accounts that are not performing, fewer loans are referred to special assets.

As an outsourced CFO, I’m not a turnaround specialist, but by providing the financial guidance and advice that the business needs, I help the bank customer increase their cash and increase their profits.  I can provide them with the clarity they need to make the hard decisions before they become the impossible decisions.  CPA’s simply can’t provide that help, they haven’t worked in a private company environment.

Bankers often remark that they have at least three customers that need the kind of financial guidance that I can provide.  As a banker, perhaps you should as yourself "has that number changed?   Have those clients transformed their financial management – timely financial statements, updated cash flow projections, gross margin analyses, etc. so that they are no longer 'watch' accounts?"  I understand that there may be a reluctance to “referring” a client to an outsource CFO.  But introducing the customer to a business resource is a service that pays dividends, not only by being a banker that has helped their client through a tough time, but also by moving that customer back along the continuum towards Valued Customer and away from Special Asset. 
There is no cost and no obligation whatsoever for my assessment of your customer.  Simply by calling your customer and saying “Can we meet for lunch?  I have someone I’d like to introduce to you” may be the first step that Tim and Paul agreed would be the best first step in helping troubled clients.

Many companies develop strategic and operational plans only to have their value dissipate due lack of accountability.  Creating an accountable organization is an ongoing continuous process. 

“Accountability is a concept with several meanings. It is often used synonymously with responsibility, answerabilityand other terms associated with the expectation of account-giving. In leadership roles, accountability is the acknowledgment and assumption of responsibility for actions, products, decisions, and policies including the administration, governance, and implementation within the scope of the role or employment position and encompassing the obligation to report, explain and be answerable for resulting consequences.” (Wikipedia).

The owner is accountable to a number of stakeholders of the company, individuals or companies that may not have an ownership interest but have an interest in the success of the company.  Stakeholders include vendors, bankers, and employees as well as the customers who depend upon the product or services.  The managers need to be accountable for the promises and performance of the company against plans and projections.  To be held accountable, stakeholders must be able to compare actual performance to the promises made, comprehend how performance differed between the promise and the actual, and communicate changes to future performance that the company will implement from that point.

“Comparing” requires timely generation of financial statements and any other standards used as Key Performance Indicators (KPI’s). “Timely” means that they are produced after period end so that management can affect the next operating period.  “Period End” because some measures might have weekly timelines, some monthly and still others quarterly.  In the restaurant industry, nightly P&L’s are generated to monitor performance.  Financials generated the middle of the following month can’t be used to affect performance in that month.  To compare, the goals and indicators need to be side by side for easy comparison.  Without this specificity, you have only set up potholes for failure.

“Comprehending” means understanding the root cause of differences.  Changes in sales, the product mix of the sales, staffing – all of these impact the differences between the budget or forecast and the actual performance.  Often times increases in sales are not accompanied by comparable increases in profitability, so understanding why the bottom line is better, or worse, is important in changing behaviors later.  9 times as much time should be spent on analyzing the results as is spent preparing the comparison data.  Since timeliness is important to affecting current behavior, having your CFO prepare the data quickly and efficiently is key to driving organizational change.

With the crystal clear expectations set from the beginning, Accountability means going public.   Communicating is publicly acknowledging both the successes and the failures of performance, creating a system of notification and dialogue regarding results.  Communicating results requires dialogue to confirm that the message was transmitted and questions have been resolved.  Most importantly, Management must communicate an action plan to change behaviors to continue or to improve performance in the next period.  Invite feedback – look for people who are actually doing the work to reflect on their performance, their feedback may contradict the numbers, and add context or provide explanations that numbers alone can’t provide.  Most importantly communication provides connection – enabling people to connect their performance to the overall performance of the company.  Communication occurs verbally and visually –signs, graphs or pictures help to reinforce the message.

Preparation, Execution and Accountability – the three most important aspects of your 2010 plan.  Your CFO is a valuable resource in developing the plan, providing actionable goals to enhance execution and providing the comparisons and analysis for holding individuals accountable.  All companies need a CFO, most don’t need one full time.  With your B2BCFO, you have a seasoned professional available when you need a CFO.

When an organization conducts its strategic planning cycle, close attention is paid to the sales plan, budgets and the elements of the cost of goods sold.  Organizations look at the controllable costs – Material, Supplies, Labor, etc.  But when it comes to benefit costs, the concept of “Planning” seems to be counter intuitive.  Most organizations consider them almost uncontrollable and either “grit the teeth and bear it” response to premium increases imposed by the insurance companies or carving out benefit levels or value and cost shifting to the employees to save the increase, getting  the same or less for more.  But are these really sensible reactions for an expense that is typically the third largest expense after materials and labor? A Strategic Benefit Plan will significantly capitate or reduce total premiums paid without affecting coverages and needs to be a part of every company’s strategic and operational planning cycle. 

The first step to establishing a Strategic Benefit Plan is to realize that a company can significantly affect premium costs.  Just this change in mindset alone is a significant difference in approach.  Just as we plan our revenue targets for the next three to five years, sit down and plan what costs the company can absorb and still meet its performance targets.  Document the average per employee cost targets for each of the planning years.  Remember the SMART goal acronym and apply it to these targets.

Just as you would do a SWOT analysis on sales growth targets, you now need to do a similar analysis on the risk pools that cause premium growth.  What are the factors that had led to your historic premium growth?  Over the next 3-5 years, what other factors may affect the employee pool?  What about the dependant pool?  Age, demographics and other risk factors need to be considered.  If you plan growth in your employee pool,  how will your company control (within the law) the potential risk factors that you may hire into your current pool?  Document your approach and findings to support that change in strategy.   This is especially important for groups smaller than 100, where utilization reports can be hard to extract from the insurer.  

Controlling the costs of your existing pool of employees requires a pool of funds without increasing the overall costs of your current health care plan.  The best way to develop that pool of funds is to move to a high deductible plan from your current plan with a Health Reimbursement Account (HRA) component.  For a 100 employee plan with a $500 can cost an average of $10K per employee per year or $1,000,000 in premium per year.  Moving the deductible to $2,000 can reduce the overall premium 20%, or $200K.  So that there is no affect on the employee, your HRA will reimburse employees for the $1,500 difference between the old deductible and the new deductible, or a maximum risk of $150K.  The minimum net savings is $50K.  But since most employees rarely hit their deductible, most of the $150K is saved per year – about $125K.

This is where the work stops for most companies.  They take the total savings of $175K to the bottom line and congratulate themselves.  But the savings are a one-off.  The next year, premiums will increase 20% and the steady drum beat of growth continues.  A strategy puts into place a plan that affects the long term growth rate of the target.  Your strategy needs to affect the Weaknesses and Threats of your risk pool.  Like any other risk, your need to assess your exposure to those weaknesses and threats.  The best way of doing so is to have your employees take a “Health Assessment” – an annual battery of tests which can tell you how your overall population fares for cholesterol, blood pressure, etc.  Your insurance agent should be working with you to assemble those tests based on your SWOT analysis.  These targeted assessments, along with your utilization reports can reveal the overall population risks your company experiences.  Once the exposure risks of the overall population are understood, you and your agent then tailor your wellness programs to address those specific risks.  For example, if your employee population is overweight but non-smoking, your wellness program will stress weight loss, not smoking cessation.

Progressivity is important in any strategic plan – all goals shouldn’t be achievable in the first year - so the access to the HRA reimbursement is adjusted from year to year.  Key to the strategic plan is making the source of the risk factor progressively accountable for the long term cost controls.  For example to be able to access all $1,500 the second year, the employee must be enrolled in a wellness program that addresses the risk factors of the employee population.  In the third year your company could add a requirement that the dependants have a Health Assessment.  As your company expands the pool of participants in the Assessment program and adjusts the parameters of the wellness program, the annual premium costs will level off as the number and size of the claims are reduced.  You and your agent should be actively managing the wellness program and progressivity each year to address changes to the assessed risks of the employee pool   to protect the value that the company is able to offer.

Does this work?  In case after case, annual premium increases level off after the third year of implementing a Strategic Health Care plan.  This occurs in both union and non-union environments, office and blue collar.  It is estimated that for every dollar spent in targeted, actively managed wellness programs, three dollars is saved in claims and premium costs.

Bending the cost curve requires an active health care strategic plan.  Understanding that you can plan your healthcare costs by knowing and targeting your risk exposure is the first step.  Create a pool of savings that can be used to incent your employees to participate in the strategy – they need to have some skin in the game.  Create annual targets based on participation in the wellness program, increasing their rewards based on their – and their dependants – participation.  Actively manage the wellness program to respond to the risks of the population – the risks will change over time by age of the employee base and through addition of new employees, birth of dependants, etc.  Implement your strategic health plan and eliminate increases in your premium expenses.

The previous article “Who is watching YOUR Controller” foretold the current situation at Koss.   For those of you not in Milwaukee, or who are not shareholders of Koss, here is a synopsis of the situation as it stands currently.  It is alleged that Sujata “Sue” Sachdeva ,  the now former Vice President of Finance of Koss Corporation, allegedly embezzled some $4.5 million in funds from Koss Corporation, a maker of stereo headphones located in the Greater Milwaukee area over a period of years.  The money is alleged to have been used for a lavish spending spree including millions of dollars worth of clothing, much of it unworn, stored at her home, at her office at Koss and at a 1,000 sq. ft. storage facility in the Historic Third Ward.  Just recently the allegations were extended to cover some $20 million of suspicious transactions since 2006.   My article discussed the effects on a company of not having adequate supervision  and controls on a company’s cash and accounting systems.  The alleged internal fraud which is currently being uncovered at Koss reveals how large and small companies need someone to review the financials on an ongoing basis.  

How could this have happened?  Koss is a public company, with audited financial statements, a board of directors, etc.!  The problem is one of basics, that ALL companies need to both understand and prevent.  My earlier article stated “B2B® partners often find that many business owners unintentionally place their employees in a position to steal from the company by giving them almost total control over the company's finances and having absolute trust in them.”  Sachdeva, almost immediate upon her hiring was placed in a position of absolute trust.  In 1992, just a year after the son of the founder had taken over the company, she was appointed Vice President of Finance.  At 29 years of age, Sachdeva was essentially CFO, as the CEO held all three titles – CEO, COO and CFO.   A year later, her husband received a fellowship in pediatrics at a hospital in Houston.  Michael Koss, the CEO, allowed her to telecommute from Houston to her position at Koss using the phone, fax and computer.  This continue for over 10 years and still was the case for an average of two days a week as recently as reported in 2007 in CFO magazine.  This level of absolute trust, with all of the electronic means to move funds at her fingertips, placed her in a position where a fraud, as alleged, could both be committed and concealed.  High Visibility magazine noted in 1996 that she was the ONLY CFO they knew of in the country to telecommute.

Small businesses do the same thing.  Business owners are focused on growing the business sales and allow bookkeepers, people they trust, to write checks, balance check books, receive funds and code expenses.  Clerks who work for the bookkeeper, like the clerks who worked with Sachdeva, perform the work expected of them in the unspoken understanding that their boss knows what they are doing.  In the book “The Danger Zone” Jerry Mills notes that most such schemes are not elaborate.  Usually the money embezzled is expensed to Cost of Goods sold.   The Journel-Sentinel article regarding Koss dated 12/29/2009 also noted that this is the case.  And with the multiple titles, reduction of staffing at Koss, and the variation of costs due to rapid model changes and the economic environment, tracking changes to costs and noting abnormalities would be difficult for the CEO/CFO/COO to analyze without the help of an experience financial executive to analyze performance.  He apparently relied upon the same person who is alleged to have committed the fraud.  Think about how many hats the owners of small, non-public, companies wear…they are putting themselves in the same risky position that Koss may have been in.

“But I know my employees” we often hear business owners comment.  The problem with this statement is being able to discern spending that is unusual.  Your Controller, when he buys a car that seems expensive for his pay, may comment that his wife works and so he can afford it.  Sachdeva’s alleged spending might not have seemed out of place due to both her pay and her husband’s income as a doctor.  It is apparent from news articles that Koss had not been into her office recently, as it was one of the storage locations for thousands of dollars of clothes. 

What about internal controls?  What about the auditors?  Koss had periodically downsized staff over the years – on June 30^th 2009 it employed only 73 people with sales of $38 million annually - so clerks may have been performing multiple roles.  The outside auditors had not opined on internal controls nor had been engaged to do so, since Koss’s size exempted it from Sarbanes-Oxley requirements.  Koss could have still have required an internal controls audit, but due to staffing they may not have met the segregation of duties standard required under Sarbanes-Oxley.  A negative opinion would have been worse for their stock value than not having an opinion that was not required.  Did they do their own review of their controls – apparently yes, but if the person alleged to have been committing a fraud was also in charge of the review, how effective could the review have been?

How would a company avoid the tragedy of fraud?  Most business owners aren’t trained to catch fraud committed by employees or are too busy to focus on the issue.  Michael Koss’ degree is in anthropology, not business or finance and he wore the hats of all three C-Level titles.  As a business owner, be alert to signs of possible problems such as employees who appear to be living beyond their means, like thousands of dollars of dresses stored in their office, or who never take a vacation (because they can work from anywhere) or who guard access to the accounting system. Business owners should also review all cancelled checks and look at the endorsement on the back. It's also a good idea to review the bank statement each month paying particular attention to transfers – like the large transfers that caused American Express to finally call Michael Koss.  The list of ways to prevent employee theft – and more importantly to prevent employees from being tempted to embezzle - is long. The best solution is to engage an experienced senior financial executive to look through the records on a monthly basis and review transactions.  By letting the staff know a process is in place, temptation and opportunity to steal would be significantly reduced. No process can guarantee complete elimination of employee fraud; however there are steps that you, the business owner, can take to minimize the chance of fraud in your company. So tell me, who is watching YOUR Controller? A B2BCFO can bring you great peace of mind!

In part one of this series I reviewed what not to do when you are a troubled company and have an SBA loan.   In part two, I discussed what the Lender and the SBA could do.  Both times I stressed that you need to have a plan, based on facts, to decide your strategy and direction – BEFORE you bring an attorney into the mix.

A plan should cover four main areas.

Cash Flow – What are your real cash expenses?  Can you eliminate some cash expenses – NOT payroll taxes or any other taxes!   Having a sheriff lock your doors because your haven’t paid taxes will affect everything else you do.  Document your assumptions….the lender will look at those first, before ever looking at the numbers.  If you are going for a deferment, your numbers need to be rock solid.  You can’t go to the well twice.  If you can’t support a reasonable deferment, then you need to consider an Offer In Compromise.  Your CFO should create and maintain the Cash Flow Forecasts.

Repayment – Have you been paying?  Have you been paying what you could?  When times were good, were you on time or did it take a phone call or dunning letter?  Lenders want to help those who have honored their debt in the past.

Responsiveness – When lenders want data, they want it on time and accurate.  In many banks, once the deadline for documentation passes, you will be automatically declined for a deferment, and be scheduled for liquidation.  In other words, they will shut you down and sell your stuff.  Your CFO should be able to provide everything on demand.

Collateral – Remember how I have repeated that you need to know the condition of your collateral? No estimates of inventory will work…accurate counts and values.  Know what the liquidation value is of your equipment.  Don’t depend on fixtures or leasehold improvements, they have no value to anyone but you.  You need to know whether you assets can be sold to recover the value of the loan, and if not by how much will you miss it. 

But wait – you guaranteed your loan…what will happen?  Will they kick me out of my house?

There are really three options regarding your guarantee. 

If you didn’t pledge your home against the guarantee, they will probably not act against your principle residence.  The bank won’t benefit from obtaining a lien against the home – the guarantee from the SBA makes them whole.  They certainly won’t if there isn’t enough equity in the home.

If you pledged your home, what is the loan to value?  If there is enough equity to satisfy the loan, they probably will try to obtain a lien against the home.  The SBA will sometimes entertain releasing a lien on your home as part of an Offer In Compromise.  So in the case when you do have equity, you do need to come to the table with a strong offer to settle your debt.  If there isn’t any equity, they probably won’t kick you out of your home.  They want cash, not a home foreclosure – especially in this market.  They may place a lien on the property, one that they can release if satisfactorily paid in an Offer In Compromise.  The lien will sit there until you try to refinance your home or sell it.

The bottom line here is that before the bank goes after your home, you will have the opportunity to settle your debt via the Offer In Compromise process.  You have some control over the situation.  The best time to take control is…as soon as possible.  Don’t hide from your lender.  You need to face them so you can reach a mutually agreeable resolution, and ultimately keep your home out of harms way.  And you need to do it with your CFO by your side.

Finally, please realize that this doesn’t mean that you will be blackballed from the SBA loan program.   Losses and business closures happen all the time.  If you want to be an entrepreneur in the future, though, you need to take care of the current note in a responsible fashion.

Close

In part one of this series, we discussed about the need to approach the Lender with a plan and alternatives.  You and your CFO should have pulled together an analysis regarding the collateral condition, cash flow forecasts and debt capacity, and an analysis regarding guarantees. 

Why is a plan so important?  You, as the Borrower, need to direct him to the best possible alternative and provide him with the support for the decision.  A Lender’s powers are clearly defined in the loan documentation.

A Lender’s general powers typically are, without notice and without the borrowers consent:

A. Bid on or buy the Collateral at its sale or the sale of another lien holder, at any price it chooses;
B. Incur expenses to collect amounts due under this Note, enforce the terms of this Note or any other Loan Document, and preserve or dispose of the Collateral. Among other things, the expenses may include payment for property taxes, prior liens, insurance, appraisals, environment remediation costs, and reasonable attorney's fees and costs. If Lender incurs such expenses, it may demand immediate repayment from Borrower or add the expenses to the principal balance;
C. Release anyone obligated to pay this Note;
D. Compromise, release, renew, extend or substitute any of the Collateral; and
E. Take any action necessary to protect the Collateral or collect amounts owing on this note.

In addition, there is a paragraph from the Debt Collection Act of 1982 and Deficit Reduction Act of 1984. It states:

"These laws require SBA to aggressively collect any loan payments which become delinquent. SBA must obtain your taxpayer identification number when you apply for a loan. If you receive a loan, and do not make payments as they come due, SBA may take one or more of the following actions: -Report the status of your loan(s) to credit bureaus
-Hire a collection agency to collect your loan
-Offset your income tax refund or other amounts due to you from the federal government
-Suspend or debar you or your company from doing business with the federal government
-Refer your loan to the Department of Justice or other attorneys for litigation
-Foreclose on collateral or take other action permitted in the loan instruments."

What can the SBA do?

1.      Deferment – This means deferring some or all of your normal payment.  Your cash flow needs to indicate that you can cover ongoing operational costs, but not the debt service on the obligations.  As one writer has described it, cash needs to be “juuuuuuusst right”.

2.      Offer in Compromise – If your cash flow is not sufficient to cover ongoing operational costs, winding down the operation quickly to preserve collateral may be the best option.  This is an emotionally difficult decision.  Banks, if they cannot do a deferment, will want you to present a plan for orderly liquidation of the company.  It is important to know the liquidation value of the collateral – typically called the “Quick Sale” valuation.  Equipment brokers and distributors are your best bet for such a valuation.  Your offer, then, is an offer to pay any shortfall against the debt.

3.      Foreclosure – an involuntary liquidation of the business.

It’s easy to imagine how you can make a mistake, this is why you need a good CFO to help guide you through the maze of consequences. Do you know what to do when the sheriff seizes your equipment for the leasing company, or you can’t make a rent payment, or the IRS padlocks the door for past payroll taxes or if you are out of cash and the “Big Check” is lost in the mail?  The list could be much longer. You can’t imagine all the problems for which you don’t have an answer. If and when you decide wrong, you could be shutting your doors prematurely and paying your creditors out of your own pocket. 

Remember when you were in school. Leading a troubled business is like having a pop quiz the day after you were sick. It’s not your fault you missed yesterday’s lesson, but now you must have the right answers or you’ll fail. With the right B2BCFO on board, it’s like sitting next to the brightest kid in the class with permission to copy his answers.  In Part 3, I will talk more about the elements of a plan and some of the strategy you and your CFO need to consider.

Your company and your SBA Loan

In the past 18 months the US has experienced a vast decline in business and business outlook.  This has affected the large (GM, BofA, Merrill Lynch) as well as the small mom and pop store on mainstreet.  Daily I talk to business owners who have seen 30 to 50% or more declines in their sales activity.  Unfortunately it seems to have affected the smaller businesses – and those who have SBA loans – more than others.

Businesses and their bankers are now faced with difficult decisions, and those decisions may affect the small business owner for the rest of their life.  What should you do?  What are the options and alternatives?  The information below will help you through that process.

What NOT to do (Courtesy of Dan Betts):

Realize that there are three factors that are affecting your approach to solutions:

·         Stress and Worry – Taxes, Payroll, Guarantees and Family concerns.

·         Lawyers - Enough said

·         Innocent Mistakes – making the wrong move might cost you more, so you do nothing.

Doing nothing is not an option.  The only way to get beyond the stress and worry is to develop a reasonable plan that can be acted upon and to know the consequences.  Lawyers can be an important part of the final solution but they can’t, and won’t, make decisions for you.  Once you bring lawyers into the process, both sides “lawyer up” and you lose alternatives.

What NOT to say (courtesy of Jasonlees.com):

·                 It’s not my fault, the economy is terrible!

·                 Your bank got government money, so you should help me!

·                 If you give me another year, the business will get back on track!

·                 Your bank will lose money if you shut me down, so it makes no sense to do that!

·                 I didn’t realize you wanted me to make a payment, I thought you were working on a modification/deferment.

You are dealing directly with a banker, your banker in most cases, who trusted you enough to recommend the loan.  What HE is looking for is a businessman who knows enough to formulate a reasonable plan that the banker can recommend to his boss, or the “Special Assets” department.

What a SBA Loan isn’t:

            It isn’t like having a rich uncle guarantee your loan.  Don’t pay - no harm, no foul.  The guarantee is for the Banker, not the Borrower, so that the Banker has enough of the risk taken out of the loan that they are willing to make it.  If a banker can, he would rather write a conventional loan any day than a SBA loan – it takes less work.  But the SBA requires the bank to do everything that they normally would to satisfy the loan BEFORE the guarantee will pay.  If they can avoid the time, trouble and expense of collection actions, they will – but they need the borrower to provide them with reasonable evidence that the course of action won’t result in recovery.  Your plan is a key part of that evidence.

The common thread is a plan.  You need to develop a plan that answers the following questions:

1.     How much free cash flow (cash flow before debt service) does my business generate?

2.     What is the condition of the collateral of the loan?

3.     Based on the two answers, of the three basic alternatives, what makes the most sense?

At B2BCFO, we support our clients with proactive financial planning and reporting for their businesses, in a way that most CPA firms are unable to provide.  I and my fellow partners have over 25 year of experience dealing with real business issues.  If you were a B2BCFO client, you would be dealing with problems while they were still on the horizon – through budgeting and forecasts – so that problems are avoided.  Call now for a top to bottom business diagnosis.  The report is free.  The comfort is priceless.

David Buslee is a B2BCFO partner located in Southeastern Wisconsin.  He can be reached at (262) 271-2522

Successful companies are those that execute.  That is about as blunt as one can get.  Companies executing a mediocre strategy will out-perform any company that fails to execute a great strategy.  Then why don’t they teach that at B-School?  Because it is messy.  Because it has so many variables.  Because it involves people!  A great manager, Peter Drucker said, obtains extraordinary results with ordinary people.

What is the biggest roadblock to execution of a great strategy? “Good Enough”!  Excellence is undermined by acceptance of “Good Enough”.  Managers and the individuals they work with accept “good enough” when the goal is either poorly explained or seems to move.  The key to Great Execution, the key to Excellence, is FACE-time.  FACE stands for Focus, Actionable Goals, Compelling Intensity and Engagement Cadence.

Focus – some companies are convinced that if a few goals are good, then a lot of goals are great.  The idea being that if you have, say 20 different goals, then some of them are bound to be achieved.  But studies have shown that the more goals one has, the FEWER are achieved…not on a percentage basis, but on an absolute basis.  If a company has 2 or 3 goals, it will achieve 2 or 3 goals.  But if it has 4 or 6 goals, it will achieve on average 1 or 2 goals.    More than 10, the odds are none will be achieved.

I have been a firm believer in having three goals for a company.  With three goals, you can avoid gaming between the goals.  We all know, I hope, that profit or EBITDA are measures that depend, in part, on accounting decisions or policies.  What level items get expensed versus capitalized, how obsolete inventory is calculated or accounted for, etc. all affect these figures.  So having a single goal of EBITDA can ultimately be meaningless to the overall performance of the company.  A footstool needs three legs to stand on its own, likewise three goals allows the performance of the company to stand on its own.

Actionable Goals – The focus of the team should be on goals that they can actually affect.  For example, if the corporate goal is to increase cash balances by $250K by year end, the actionable goal may be to improve AR days.  The team can then break that goal down into smaller actionable goals that they can immediately affect, such as reduced billing errors, reduced shipping errors, and reduced booking errors. 

What is a Goal?  The best description of a Goal is (verb)(measure) from (X) to (Y) by (when).  For example: “Reduce billing errors from 10 per thousand to 2 per thousand in 12 months”.  “Reduce” is the verb, “billing errors” is the measure, “10 per thousand” is the “X”, “2 per thousand” is the “Y” and “12 months” is the “when”.  Any goal that isn’t constructed this way isn’t a goal.  It may be a “Hope” or and “Aspiration” but it isn’t a GOAL.

Compelling Intensity – Businesses that succeed have an energy.  You walk into a successful company and you immediately feel the excitement.  What causes the excitement?  The heat of competition.  People love to win.  The only way to tell if you are winning – or losing - is by looking at a scoreboard.  Six Sigma devotees know that the only way to drive behaviors is to have a visible scoreboard, publicly posted, with the goal and milestones easily distinguished. 

A good acronym for how to set up the scoreboard is MUCAS.  Motivating, Updateable, Complete, Accessible and Simple.  Motivating – they must display the information in a way that motivates the observer to action.  Updateable – Scoreboards are worthless if the numbers can’t easily be updated.  Your CFO can help develop the measures that and methods to keep the figures updateable.  Complete – Scoreboards must show all of the actionable goals for the organization.  Whatever isn’t shown won’t be worked on.  Accessible – EVERYONE in the organization needs to be able to look at the scoreboard whenever they need to.  Simple – the measurements need to be easily understood.  Your CFO can help the team to define the measures so that everyone can understand them and how they affect the corporate goal.  Compelling Intensity is all about getting people to play!

Engagement Cadence – Successful companies engage the associates in the goals on a regular basis.  This cadence, just like a coxswain on a crew team, moves the team at a higher level of effort than they could achieve on their own.  A regular drumbeat of review creates windows of action and set time frames for achievement.  By regularly and reliably gathering and reviewing progress towards the goal, accountability is developed.  Organizations easily develop the “Are We Still Doing That?” attitude if they are regularly engaged.  How can that be?  Because Goal Achievement is extraneous to their regular job!  Their Day Job is what pulls them away from Goal Achievement.

Think about it like this – most people trying to do weightloss earnestly want to lose weight.  But then the holidays happen and they get pulled towards the pumpkin pie.  If they are being regularly reminded of the goal, and the progress to the goal, they will back slide.  That is why all successful weight loss programs have a regular weigh-in, and celebration of progress towards the goal.  Weekly meetings of the team are required for successful engagement.  Your CFO can develop the goals and tracking systems necessary for this feedback mechanism.

Weekly meetings should be short reviews with a fixed agenda.  They work best as “standing meetings”  where everyone stands during the meeting.  The Agenda is simple.  Associates report on the actions that they had committed to the prior week that would move their score, how they affected the score, and commitments for the next week.  Managers need to make sure that they report on actions that can affect the score, NOT on their day job activities.  Regular meetings create a drumbeat of progress and move the team quicker than they could ever imagine.

Getting ready for 2010 is all about Preparation, Execution and Accountability.  No plan is successful without strong, steady execution.  The key to execution is to Focus on key areas, create Actionable goals, create Compelling intensity through scoreboards and an Engagement cadence for a steady drumbeat of progress.  Your CFO is a key element to making the execution happen through directing goals, creating scoring systems and providing the regular feedback to leaders throughout the company.  If you company doesn’t have a CFO, isn’t now the time to hire one?  At B2BCFO, we believe every company should have a CFO, but most don’t need one full time.  We help you exceed your goals and generate cash.