| Short-Term
Cash Flow Problems Plague Young, Rapidly Growing Company
Scenario
This CB&H client provides IT-related services
to federal government agencies. The company is growing rapidly (generating
over $25 million in annual sales) and has opened five offices within
three years of beginning operations. The client sought assistance
in developing a financial projection requested by its secured lender.
We suspected that the client might be experiencing financial problems
when its current secured lender requested detailed projections.
Our suspicions were confirmed when we met with the company’s
controller to discuss the projection. The company had a negative
net worth and continued to lose money. Checks were bouncing and
the company was experiencing problems with suppliers. Financial
records were in disarray (for example, a bank reconciliation had
not been completed in over seven months and internal financial statements
showed negative amounts in inventory).
At a meeting with the company’s president,
we probed further for problems the company was experiencing and
explained how we could help. The Government Contractor Consulting
group was engaged to assist to improve this situation.
CB&H Action Steps
Our first step was to gain a detailed understanding
of the company’s business. We then developed a detailed financial
model that allowed management to accurately assess profitability
by location and product line for the first time. In constructing
the model, we dealt with the disorganization of the company’s
financial information. We used the model in assessing the impact
of operational changes we recommended. This helped management gain
a better understanding of the problems the company confronted and
aided in communicating with the company’s current secured
lender and other potential lenders.
We assisted management in arranging a short-term
line of credit with its largest supplier in order to give the company
some breathing room. Based on CB&H’s involvement, we were
able to convince the secured lender to double the line of credit.
This gave the client the ability to absorb our recommended changes
and arrange a credit facility that would better accommodate its
rapid growth.
Because of the poor state of financial and operational
information, company management was forced to make decisions with
inaccurate and incomplete information. We developed various analyses
of the company’s operational data so that we could supply
management with better information for decision-making. We created
a detailed analysis allowing management to understand true revenues
and costs realized. Simple improvements were also identified, such
as how consultants are scheduled, which allowed management to immediately
begin recognizing cost savings.
We are currently in the process of assisting
the client in finalizing a credit facility with a new lender. This
credit facility, from a traditional asset-based lender, will allow
the company to better leverage its collateral at more favorable
rates and at a lower cost with fewer restrictions on the company’s
growth.
Results
Through the efforts of the CB&H Government
Contractor Services group, the client went from losses and a negative
cash flow to profitability and a positive cash flow. The company
can once again concentrate on generating sales and planning for
the future rather than contending with short-term cash flow problems
and dealing with reluctant vendors. Now the company can continue
to grow without the owner having to give up any ownership to outsiders.
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