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YOUR CLIENT IN THE MIRROR

(from a lender’s perspective)

EisnerAmper LLP

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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 Sun National 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 – 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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PAYABLESPAYABLES

• 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 Method Goods

Available to Buyer

Risk to Exporter

Risk to Importer

Cash in Advance After Payment None Maximum

Letter of Credit After Payment Virtually None

Virtually None

Documentary Collections – Sight

After Payment Modest Some

Doc Collections – Acceptance

Before Payment Moderate to Strong

Minimal

Open Account Before Payment Maximum None

Consignment Before Payment Maximum None

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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 anOptimum 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!