CPA Presentation for Hunter Group
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Transcript of CPA Presentation for Hunter Group
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YOUR CLIENT IN THE MIRROR
(from a lender’s perspective)
The Hunter Group
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Lender’s Perspective of Your Client’s State of Affairs
“What’s on a Lender’s Mind?”
by Yuri Piltser of IDB Bank
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Discussion Outline
• How the Banks View Your Client • How to Help Your Client Become Financially Stronger• How Your Client Can Improve Their Cash Flow • 9 Keys to Your Client’s Success (plus a bonus Key #10)
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When Your Client Looks in the Mirror –
what do they see?• ASSETS • LIABILITIES
• EQUITY
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Balance Sheet
• CASH• ACCOUNTS
RECEIVABLE • INVENTORY• FIXED ASSETS• INTANGIBLE AND
OTHER ASSETS
• ACCOUNTS PAYABLE
• LOANS PAYABLE
• OWNER’S EQUITY
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EQUITY
• Common Stock o Nominal Value, e.g. 1000 shares @ $1 = $1,000
• Paid-in Capital • Retained Earnings
• Less: Treasury Stock and Distributions (for taxes and otherwise)
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EQUITY (CONT’D)
• Major Advantage: it’s their Money!!!• Disadvantage: they’re last in line when it
comes to security/interest in their assets • Most expensive form of capital (the
riskiest)• More equity (i.e. “skin in the game”) buys
more OPM - “leveraging one’s assets”
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“Credit is not a right - it’s a privilege.”
Anonymous Lender
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PAYABLES
• Your Client’s Goal: to stretch them (with trade’s consent, of course) as looooong as possible
• The more they can lean on Trade, the less they need to lean on Bank Debt and OE
• Cash-to-Cash Cycle: companies with the shortest cycle win! The longer the payables, the shorter the Cycle, the greater the profits, the better the cash flow
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Comparison of Various Payment Methods
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Why it’s “Good” to Have Liabilities (i.e. owe money)
• OPM is relatively cheap • Builds your Client’s credit history • Increases your Client’s ROE • Finances sales growth• Healthy leverage is good leverage due to above
reasons
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“EVERYTHING GOOD IS GOOD ONLY TO A POINT”
My Mom
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The Other Side of Liabilities
• Must Be Repaid at some point! (unfortunately) • Increases a company’s leverage • Increases the risk of corporate failure • May create stress for the company’s cash
flow/working capital (i.e. liquidity), especially during downturns
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Two Companies (with same capital) Which one would you rather own?
Company 1
• Assets $2MM (A/R and inv. of $1MM each) • Bank Debt $500M • Payables $500M • OE $1MM
Leverage of 1 to 1
Company 2
• Assets $7MM (A/R of $4MM and inv. of $3MM) • Bank Debt $5MM • Payables $1MM • OE $1MM
Leverage of 6 to 1
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Company 2’s Advantages
• With more assets, it’ll be able to create more sales on the same Capital Base
• It should be more profitable due to more sales
• ROE will be much higher as more profits are achieved on the same Capital base
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Company 2’s problems
• Leverage is very high and so is overhead • Value of Owner’s Equity is in question (if
assets are to be liquidated at 30% off) • High debts create a tremendous stress on the
company’s margins and asset turnover - they’d better be very, very good!
• Bank and Trade may get nervous • May be transferred into an ABL area (full
monitoring, intrusive, lack of flexibililty)
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Importance of Reducing Liabilities (up to a point!)
• Leverage improves • The company becomes more attractive to lenders • With new bank capital, growth opportunities
increase (little secret: lenders love your client’s trade payables!)
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Three Ways to Reduce Liabilities
• Earn profits and retain them • Speed up Asset Turnover (i.e. reduce inventory and
receivables and use that cash to pay down debt) and make more money by doing that
• Infuse new capital into the company (either client’s own or new partners)
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NWA TURNOVER A/R Days + Inventory Days - A/P Days = NWA Turnover Days Example 1: 90 days + 90 days - 90 days = 90 days (NWA turn 4 times a year) $200M (profit on each NWA turn) x 4 = $800M Example 2: 60 days + 90 days - 120 days = 30 days (NWA turn 12 times a year) $200M x 12 = $2,400M [bought on 3/1, paid A/P on 7/1, got paid on 8/1]
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NWA TURNOVER Example 1: $200M (profit) x 4 = $800M NWA of $2MM x 4 = $8MM in sales
Example 2: $200M (profit) x 12 = $2,400M NWA of $2MM x 12 = $24MM in sales
THREE-FOLD INCREASE IN PROFITS AND SALES DUE TO TURNOVER EFFICIENCY ON THE SAME CAPITAL
BASE!
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Another Advantage of Quick Asset Turnover
Assumption: The company’s overhead is $800M
Example 1: No pricing flexibility! (if prices are reduced, there’ll be a loss)
Example 2: Strong pricing flexibility (may go down to 5% GM, i.e. $1,200M, and still be able to cover the overhead!)
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NINE KEYS TO SUCCESS
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THESE KEYS WILL LEAD YOUR CLIENT TO:
• Maximize the value of relationships • Maximize the value of leverage • Maximize the value of knowledge • Maximize the value of their assets• Maximize the value of their equity • Maximize the value of technology• Execute and Create Wealth!
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Key # 1: Quicken “Asset Turnover”
• Improves liquidity; creates cash to create more cash (i.e. your client need to try maximizing a number of cash cycles)
• Make your client’s assets work for them • Allows your client to sell at lower gross
margins, improving their competitiveness • Improves their profitability (as they make
money on each NWA turn)
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Key # 2: They Need to Have Strong Trade Support
• Helps the company’s cash flow via improved NWA turnover (shortens the cash-to-cash cycle)
• The cheapest source of financing/OPM (typically free or below bank rates)
• Helps the company’s sales growth; to grow sales one needs assets; to grow assets one needs trade and bank support
• Builds necessary business relationships and makes your client an “industry player”
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Key # 3: Have a Strong Capital Base
• The company is only as good as the quality of its assets
• Past due, old receivables and obsolete inventory skew the capital’s true value (like clogged arteries, they weigh the company down and impact its financial health)
• Retain!• Good capital base attracts OPM at attractive rates!
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Key # 4: Have a Low, Well-Managed Overhead
• Fixed Costs should always be kept in check • High overhead puts a tremendous pressure
to maintain high gross margins to pay for these fixed costs
• Low overhead provides companies with flexibility; “lean and mean” infrastructure
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Key # 5: Strive to Achieve an Optimum Capital Structure
• Maximize ROE while keeping a “risk of default” in check
• Too much equity - ROE may be too small; • Too much debt - Default risk may be too high;
OPM may become too expensive and scarce; may wind up “relying on the kindness of strangers”
• Ultimate high-wire act – where is that fine line for capital structure?
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Key # 6: Decommoditize What They
Sell!
• Your clients need to make their products/services less price-elastic; add “proprietary” value
• Create a want (a need already exists) by differentiating yourself from others
• Protects them (somewhat) from price wars
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Key # 7: Invest in MIS – be a master of your information domain!
• Information (just like cash) is KING! • Time is Money! • Good information flow will allow your client (and
you) to make better managerial decisions in a more timely fashion; should help asset turnover and the company’s efficiency; [one example is providing a Lender/Investors with more timely reports]
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Key # 8: Your Client Needs to Build a Strong
Relationship with YOU • You should provide a Management consulting role;
quasi-CFO role; assistance with MIS • Financial reporting and Tax advice • Provide Risk Assessment • You know lenders (and what they want) and may
greatly facilitate the banking search process
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Key # 9: They need to Build a Strong
Relationship with a Lender • Like an Accountant, a Lender should be their
trusted advisor • Lenders know about Government Programs (EXIM
Bank, SBA programs, OPIC) • Your clients need to nurture the relationship by
providing timely, quality information; No Surprises!
• 5 C’s which matter to lenders: Character, Capital, Collateral, Cash Flow, Capacity (...and some Common Sense)
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Bonus Key #10 – the most important one of all (for you and your clients)
Enjoy every day of your Life! Make the
best of it!