When Is It Too Late?
In both cases, we asked them to send us current financial statements and then we had conversations with them regarding their current financial situations.
One company owner indicated to us that he had “reached the end of the runway” with respect to his financial situation. In addition to bank debt, which he had personally guaranteed, he had additional debt that was secured by his operating equipment. As he literately could not make his debt payments or pay his rent or other operating bills, he had indeed reached “the end of the runway”.
Sadly Typical …
What was sadly typical about this call was both the financial information we received and the information we received from the owner. Part of the information was his business forecast for 2015. According to his forecast, he was about to get new business that would both make the company profitable and allow him to pay his debts. So we asked a few questions.
Hope Is Not A Strategy …
As, in order to reach the revenue objective he presented in his plan for January, he had to have the purchase orders in December, we just asked him if he did indeed have the orders. The answer was that while he had some of them, a few were “late” but he was sure they were coming. At that point, one of our favorite quotes came to mind: “Hope is not a strategy”.
Next we reviewed his financial performance for the past two years. Due to a number of changes within the industry and his desire not to continue supporting low margin customers, he had decided to only deal with customers where he felt the margin was satisfactory. His business had lost money every month since he changed his strategy.
For almost 12 months, he could see the losses on his financial statements and yet he was sure that if he just persisted, things would turn around. His goal was just to borrow enough money to give him enough time to make that happen. Which led us to our very favorite quote: “The definition of insanity is doing the same thing you’ve always done and expecting to get different results.”
As all of his potential collateral was already supporting debt and he didn’t want to take on any additional personal risk, we had to tell him that we did not see how we could help him. The good news is that he had a competitor that was willing to buy his company for taking on and guaranteeing the existing debt. Our suggestion was that he accept the proposal.
The Second Company …
The second company was in the trucking industry. This case was a little harder as his lender had told him that he was in violation of several loan covenants and he wanted our assistance in finding another lender. He was working with a highly respected loan broker and she had told him that he needed a plan and current financials in order to be considered by a new bank.
The owner was very distrustful of consultants. He had hired a Controller to help him early in the year. The Controller did get his financials up to date, and helped him find a new lender that supposedly would save him over $100K in interest and fees. The owners view was that he really did not save the money and the lender didn’t really like his business. But let’s look at the covenant violations:
His current lender was a factoring source and had purchased most of the company’s receivables. Some of the customers did not follow the instructions to send the payments to the lock-box, but rather sent them to the company’s office. Rather than put them in the lock-box, he had deposited them in the company’s account and spent the money. Since he had no controller, he said it took him a couple of months to realize what was going on. Really?
The company was also past due on payroll taxes for at least one quarter and was about to become past due for the fourth quarter. But he indicated that “he had a deal with the IRS.” What was the deal? It was that he pay in full, including all penalties and interest by early January.
Oh yes, this is a family business with other family members as officers. Since officers and other control persons are personally responsible for payroll taxes, his family’s assets had been placed in real jeopardy. When we asked him how he was going to pay the IRS, the answer was that “I haven’t figured that out yet.“
The Controller also attempted to solve his financial problems by having him invest in some offshore financial scheme that the Controller was also invested in. Soon afterwards the company and Controller parted ways. As a result, the owner had no financial reports for the past six months.
Given the owner’s distrust of consultants, it was fairly clear that we really could not help him. It was also fairly clear that the day of reckoning was very close. His solution, when we last heard, was that he hoped that a friend of his would lend him a significant amount of money and then he could “turn the company around.”
Entrepreneurism takes optimism and it takes belief, hard work and not a small amount of hope to get through the tough times. And believing that somehow, if I just keep going, it will all work out, is one of the most valuable traits of any business person.
When Belief Overcomes Reality …
But when belief overcomes reality and doesn’t allow for seeing, in time, the need for help; it is generally fatal to the enterprise and very detrimental to the individual.