Access to financing and improved productivity

Experts agree that one of the best strategies to boost the company’s value and secure premium pricing during the sale is to focus on value drivers. One of the most often overlooked key value drivers is productivity, since it can have a direct and dramatic impact on maximizing a company’s enterprise value. But how does a company optimize productivity without adequate capital investment and access to financing?

Numerous studies conducted by various institutions from academia to private research firms conclude that there is a strong positive relationship between access to financing and companies’ productivity.

If you’re a SME business owner who has been to hell and back, it doesn’t take empirical studies to prove the strong correlation.

Simply put, it is extremely difficult for most companies to improve their productivity or fulfill higher-than-normal purchase orders without access to external financing, both debt and equity alike.

For instance, you’re a metal fabrication company currently generating approximately $2 million in revenues over the past three years, your production plant operates at near full capacity, and has been funded by internal cash flow. Unexpectedly, your existing customer placed an order of $1 million that you need to fulfill over the next three months.

This order will essentially elevate your company from a break-even position into one that is fairly profitable. For a moment, you were ecstatic to receive this windfall knowing that the enhanced level of service you have provided to this customer is finally paying off. Then you realized you’re currently operating at 80% capacity, this order entails high customization, and you would need new equipment that costs $400,000 for purchase and installation, and inventory that costs $200,000. This emerging “bottleneck” poses a threat to your productivity.

Because your banker relies on your historical results of just above, break-even performance (presumably, your financial statements were prepared to maximize tax efficiencies), and, worse, your company has reached the Debt to Equity ratio threshold that the bank typically tolerates, The Account Manager declines your request for equipment financing and line of credit. For the same reason, the equipment supplier is unwilling to finance the purchase. You now officially have restricted access to external financing.

Your options are as follows:

1. Delay fulfillment of the order, if at all possible

2. Beg the customer for a full 50 per cent of down payment, hoping they have financial wherewithal. Frankly speaking, neither one of these options is palatable to you or your customer.

So, your other option is:

3. Turn the customer away or worse, send him to the competition.

Although it seems inconceivable to business owners who have not been in a similar situation, option 3 is in reality more common than we think.

HOW TO AVOID THE ABOVE SITUATION

Not every single business owner will run into an unexpectedly large contract, but turning away contracts due to lack of working capital and an underestimated CAPEX (capital expenditures) requirement undermines productivity.

Also, although equally important, not all small businesses have the required financial sophistication nor can afford a CFO/controller who tracks monthly cash flow, creates a detailed financial projection, and prepares a quarterly year-to-date actual performance vs. budget report. First, make sure that your financial statements are up to date. If it takes more than six months after the fiscal year end for your accountant to prepare your financial statements, perhaps you need to find another accountant.

Second, it is crucial to have financial projections outlining assumptions for every variable ready at all times. Creating projections should not only be done for your banker, consider projections as goals that business owners should aim to achieve. All large corporations have financial projections, and although it’s smaller your business shouldn't be any different. Hire a part-time CFO if you have to. Third, anticipate future orders by staying close to your customers. Finally, determine from your banker what ideal financial ratios look like and stick to them whenever possible. While most businesses show the lowest reasonable bottom line to minimize their taxes, it is not the best strategy when seeking bank or equity financing.

While this may sound counter- intuitive, banks and funders in general, like to finance healthy and profitable companies.

Alma Johns is President of Bench Capital Advisory Inc., an independent corporate finance and debt advisory firm based in Toronto. She can be reached at alma.johns@benchcapital.ca or www.benchcapital.ca.