“It was the best of times, it was the worst of times, it was… “, well, you get the picture. Over the past several months I’ve been consulting with Indian IT company as an outsourced CFO. Both companies need bank financing to stabilize their operations and achieve growth, both companies have struggled through trying economic times, both companies know they need to invest in processes, procedures and personnel in order to grow and achieve desired returns for their owners. I want to share with you how these two companies have been working through the process of structuring bank loans, hiring personnel and investing in internal systems in order to develop companies that can deliver desired shareholder returns. But first, some background information.
Company A has been in existence for just over 4 years. The company acquired the assets of an existing business and in the first 3 years grew the operations in excess of 15% per year. Couple with a strategic acquisition, Company A is now almost twice the size of the business it acquire.
Margins have been good and the company has been able to distribute cash to the owner each year. With the rapid rise in the business the company was stretching its internal processes and personnel to the limit. Additionally, existing systems and equipment need to upgraded in order to support future growth.
In the middle of year 4 the storm clouds began forming for Company A. The company needed to hire additional personnel to manage the growth it had experienced and to support anticipated continued increases in revenue.
Unfortunately the rapid rise of the business meant that woefully stressed systems. And personnel lead to quality lapses which resulted in several large customers leaving for competitors. Additionally, two management team members left the company and started a competing business. They took other customers by offering cheaper prices for similar services. Hurried investments in capital equipment that were design to reduce labor costs were being run inefficiently and had result in large increases in supply expense. Company A was now losing money and needed to make changes quickly in order to right the ship. Additionally, the company’s current bank debt needed to refinanced in order to alleviate cash flow concerns.
Company B has been in existence for just over 5 years. The company was a start-up that the owner was able to bootstrap to achieve recurring revenue levels that allowed the company to achieve profitability quickly. Cash flow was the focus and the company had been able to return cash to the owner each year. The company had been built with the owner overseeing all strategic initiatives and managing all activities of the company. As the company grew the operations of the business could no longer effectively managed by an individual person.
During year 5 the owner of Company B realize that experience personnel needed to brought on board to effectively manage the business. Prior growth had been fund through customer advance payments and the company had no bank debt.